The Chicago Board Options Exchange plans to list cash-settled options on implied volatility and variance. Puneet Kohli, who works on the prop desk of BMO Nesbitt Burns' U.S. equity derivatives division in Toronto, thinks these instruments could cause a surge in trading in the OTC market.
Kohli said current OTC trading volumes on VIX contracts are low in large part because the market has no generally accepted model. "You can't trade options on volatility without a proper model," he insisted, adding the listing of VIX options could provide the incentive to introduce one for OTC users. Large firms including Banc of America Securities, Merrill Lynch and Citigroup have their own models and Kohli expects one will be brought to the market this year causing OTC trade volumes to swell. Puneet also expects continued growth from the OTC variance market which he described as popular.
The CBOE currently lists futures on variance and VIX on the CBOE Futures Exchange. CBOE has not decided which product it will launch first, according to Paul Stephens, a director and department head of institutional and international marketing with CBOE in Chicago. He said clients have demanded these cash-settled products which appeals to CBOE because the options exchange has a broader client base than the futures one.
