Launch of VIX futures timely, but weekly expiry a concern: Traders

Written by Devangi Gandhi | Mumbai | Updated: Feb 12 2014, 18:59pm hrs
Although traders consider the much-awaited launch of futures contracts on volatility index (India VIX) on the National Stock Exchange (NSE) as a welcome move, they seem disappointed with the weekly expiry of the soon-to-be-launched product.

They believe that due to the weekly periodicity, VIX futures deemed as a hedging and trading tool on expected market volatility may witness a muted response due to mismatched expiry with other derivative contracts and concerns over transaction costs.

Globally, similar derivatives products are offered with monthly expiry.

India VIX is the volatility index based on option prices of the Nifty index and represents the expected market volatility over the next 30 calender days. It is derived by using a computation methodology provided by Chicago Board Options Exchange (CBOE). NSE introduced the index in late 2007 through its licensing agreement with S&P.

The NSE recently announced the introduction of VIX futures with effect from February 26, 2014. As per an exchange circular, three weekly serial contracts on VIX expiring every Tuesday will be available for trading. The minimum contract value is fixed at Rs 10 lakh while the lot size is still be to be announced.

Market participants are of the view that the introduction of VIX futures is timely given the increased volatility in the market and rising volumes in the options segment from where the index is derived. However, they seem disappointed with the weekly expiry on the VIX futures as all futures and option contracts have monthly periodicity.

No doubt the timing of the launch of VIX futures is interesting as the market volatility is expected to remain on a higher side as we approach the general elections. Even the vibrant options market provide good support, said the head of the derivatives desk at a domestic brokerage house.

However, we are slightly disappointed with the weekly expiry of the contract given that all futures and options contract have monthly expiry. So, during one cycle of the F&O trade, the trade on VIX future may need to be adjusted five times during the period, leading to higher transaction cost, he added.

Experts consider the weekly periodicity of the VIX future to be a concern even for the proprietary traders who are believed to be leading the volatility arbitrage.

VIX futures may be a simple alternative to volatility trading, which currently involves strategising various options contracts. Yet, on the weekly expiry day, even the bigger players that run volatility arbitrage may find it difficult to roll over their positions. They would prefer a long-dated product,' said another derivatives trader.

The VIX index generally moves up when traders start factoring in their expectations of a considerable directional move based on an ensuing event. This is because they tend to pay high premium on options when higher risk is attached to developments that can significantly affect the market. In the two weeks since the recent selloff begun on January 23, India VIX rallied from 15.55 to 19.

Globally, derivatives product on CBOE VIX are very popular although F&O products are also introduced based on Nikkei 225 index options (Osaka Exchange) and Euro Stoxx 50 index options (Deutsche Borse). Bloomberg data show that futures on CBOE VIX clocked in an average volume of 3 lakh contracts in February while options contracts witnessed an average volume of 14.2 lakh contracts during the period.