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The Trading Mesh

The Trading Congress: Capitalizing on economic uncertainty with volatility options

Tue, 26 Jun 2012 17:08:12 GMT           

This presentation was given by Dominic Salvino, VIX Options DPM at Group One Trading.

The VIX, first introduced in 1993, has proved an actively traded and volatile market, appealing to both short-term traders and those who wish to manage traditional market risk. The VIX, more specifically, is a volatility benchmark based off of the S&P option markets, 30-day forward measure.  It is robustly calculated and essentially model independent.

Though VIX “cash” is untradeable, its options market and futures market are both highly volatile, attracting numerous short-term investors.  The SPX is generally inversely correlated with the VIX, making it an attractive option for hedging a portfolio in the event of a market crisis. VIX futures are traded on a purely electronic market, the CFE, while VIX options are traded on a hybrid trading platform—meaning options are simultaneously traded open outcry and electronically.

Traders interested in entering the VIX market should note that the risk involved with these products is basis risk and a trader must be willing to accept this if trading across products and at high frequency.  Additionally, while VIX options do provide an opportunity for hedging risk, they do not provide the same certainty that S&P options do.

This panel discussion took place at the Trading Congress, at The Trading Show 2012 in Chicago.

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