VIX All-Nighters: The Good, The Bad, and The Ugly

The CBOE will soon offer extended trading hours for VIX and SPX options

Feb 3, 2015 at 9:16 AM
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You know that disappointed feeling when you wake up at 3 a.m. and want to buy some CBOE Volatility Index (VIX) calls, but the market hasn't opened yet? Well, guess what? You can kiss those days goodbye! This, from Matt Moran of the Chicago Board Options Exchange (CBOE):

"Investors from around the world have expressed interest in Extended Trading Hours (ETH) for key risk management tools, and, since June 2014, the trading hours for futures on the CBOE Volatility Index® (VIX®) have been expanded to nearly 24 hours a day, five days a week.

CBOE is planning to launch Extended Trading Hours for options on both the S&P 500 and the VIX indexes next month, contingent upon SEC approval."

I'm thinking this is both good and bad. It's good in that it's as it should be. I never understood why you could trade stocks or futures off hours but not options. We're a long way from the system where options traded solely at pits on a few exchanges, and thus you'd have to physically have a person there making markets at 3 a.m. ET. Anyone and their algorithm can make a market at any time, so why not have an easy way for them to meet?

It's bad in that it sets up for some rude awakenings, so to speak, for investors. Futures and stocks are generally not as liquid off hours, so options figure to see even wider spreads and very small sizes on bid and offer. It's likely you will have to pay up to get a transaction off, which does make sense. Anyone taking risk making markets across the board when he can't readily hedge is going to demand extra compensation. Long story short: make sure you have strict price limits and don't leave any orders out there to get picked off.

Having said all that, VIX and S&P 500 Index (SPX) options are relatively easy to price off hours. Futures trade deeply enough around the clock that it's not terribly likely to see huge slippage on a trade in either one. It's tough to know what the volatility of VIX options will do the next day, but you can make that statement about a regular-hours VIX call trade anyway. So I say, bring it on!

And I don't believe it will have any impact on the actual VIX or SPX we see when we wake up in "normal" hours. Wise guys may try to use the reduced liquidity to influence VIX, especially around VIX expirations, but let's face it: they mess around with the VIX settlement price in our current structure.

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


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