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Tuesday, February 6, 2018

-=CBOE: Shares under pressure as proprietary VIX futures rattle market sentiment

  • CBOE Global Markets (CBOE) gets a quarter of its revenue from trading in options and future on the VIX volatility index (which is the Chicago Board Options Exchange's measure of the stock market's expectations for volatility, as implied by S&P 500 index options). 
  • The CBOE Volatility Index (VIX 49.21, +11.89) has spiked 265% since last Thursday, hitting its highest level since March 2009.

Cboe is home to the Cboe Volatility Index (VIX), which is seen as a key psychological indicator on fear in the markets. It serves as a measure of the S&P 500's future volatility, and its popularity led to the launch of products which hedged against it.

And while the major averages rallied off intraday lows Tuesday following the worst percentage loss (4.6%) for the Dow Jones Industrial Average since 2011, Cboe was the worst-performing stock on the S&P 500 index.

Cboe's plunge came as trading in VelocityShares Inverse Vix Short-Term (XIV), ProShares Short VIX Short-Term Futures and VelocityShares Daily Inverse VIX Medium-Term (ZIV) was halted. Sales restrictions were also placed on all three products.

While the VIX enjoyed a record rise in the past two trading days, the forced closure of short volatility ETNs means traders do not have to hedge these trades with Cboe's VIX futures any more. Quantitative analysis trading strategies have taken advantage of volatility products, with the risk being hedged with futures contracts.

Swiss-multinational banking giant Credit Suisse (CS) holds a 32% stake in the VelocityShares Inverse Vix, which launched 2010, and issues its exchange-traded note.

The bank said Tuesday it will terminate the product and redeem the notes, which were worth a combined $1.6 billion on Friday. The acceleration date is expected to be Feb. 21, with trading to end the day before.

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