Schaeffer's Trading Floor Blog

CBOE Holdings, Inc (CBOE) Would Like to Thank the VIX...

Why the VIX got a prominent mention as part of the CBOE earnings report

by 5/8/2014 7:31 AM
Stocks quoted in this article:

CBOE Holdings, Inc (NASDAQ:CBOE) posted some nice earnings this week.

If it was the Oscars and they had to deliver an acceptance speech, guess who's getting a mention:

[CBOE Volatility Index (VIX)] options and futures, key products based on a measure of near-term volatility conveyed by Standard & Poor's 500 stock index option price movements, posted all-time volume records in the first quarter.

VIX options volume averaged 774,000 contracts per day, up 35 percent over the previous quarter, and 22 percent over the first quarter of 2013. Average daily volume in VIX futures was nearly 203,000 contracts, an increase of 32 percent from the previous quarter, and 33 percent from last year's first quarter.

"The broad sustained waves of growth in VIX trading," CEO Edward Tilly said in an earnings conference call, "are consistent with what we have seen in early stages of a groundbreaking product line, one that not only changes what people trade, but where and how they trade it.

"Many customers," Tilly went on, "are just beginning to determine how pure volatility trading fits into their various investment frameworks; as more investors enter this market, they continue to find compelling new trading opportunities that further expand the marketplace."

As we noted recently, there's evidence that credit market players are behind the growing VIX paper volume. If that's true, and that trend gains steam, yowza. The size there will dwarf equity-related demand.

And on the plus side for the CBOE, these relatively new players must take both sides of the trade. VVIX, the volatility of the VIX, continues to look pretty punk. We know John Q. Public and Joe Q. Portfolio Insurer love to own cheap dollar VIX paper. But someone's in there selling to them, because prices keep trending lower despite volume trending higher.

It all sounds good for anyone booking a commission on all these transactions.

CBOE, the stock, has done reasonably well.

Daily chart of CBOE Holdings, Inc (CBOE) since January 2013
Chart courtesy of StockCharts.com

Like the market itself, it trended up in 2013, but is spending 2014 in a bit of quicksand. I'm no fundamentalist, but apparently the stock is a tad on the pricy side. But it's shown pretty consistent growth. Options and derivatives volume has steadily increased, pretty much since the beginning of options time. And CBOE has had a terrific history of coming up with new, popular products in the space. So the little I know does suggest that a stock like this trading at a high multiple isn't the worst idea I've ever heard.

I wasn't a big proponent of the exchanges going to a for-profit, publicly traded model. It's led to exchanges serving shareholders sometimes at the expense of customers and their own membership (cough HFT cough). But it's an argument I "lost" a decade ago, and that's neither here nor there as it pertains to the CBOE. They've been the lead innovator in the options marts forever, and no reason they won't stay that way going forward.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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