Exploring New Volatility Products: The Rise of SPIKES Futures

Introduction:

In the dynamic world of volatility trading, the demand for innovative derivatives contracts has been on the rise. Traders are seeking new opportunities to complement their strategies with more established products. Recently, I stumbled upon an insightful Acuiti white paper, discussing the increasing interest in volatility trading and the emergence of new volatility products, including SPIKES Futures and Options.

Embracing Volatility Trading:

The white paper highlighted a noteworthy statistic – 44% of Futures Commission Merchants (FCMs) have reported increased interest from clients in volatility trading since 2020. Despite this growing appetite, it was surprising to learn that one-third of the firms surveyed do not currently have any programs dedicated to volatility trading. It became evident that embracing volatility trading can be a game-changer for portfolio managers, but it requires a seasoned veteran with an in-depth understanding of the market.

The Complexity of Volatility Trading:

Volatility trading is not for the faint-hearted; it demands a sophisticated approach. Seasonality effects, various market participants, and frequent price fluctuations make navigating volatility contracts a challenging endeavor. To thrive in this space, a dedicated strategy is essential, coupled with the ability to recognize opportune moments to capitalize on price movements.

Volatility as an Asset Class:

For hedged equity traders, volatility serves as an asset class with unique characteristics. Unlike other asset classes, it lacks long-term positive expected value. However, the expectation is that volatility will revert to the mean over time, creating opportunities for active management. By holding volatility against risk assets and employing an active management approach, traders can sell high and buy low on volatility while retaining long-term assets that appreciate in value.

A Cornerstone for Asset Managers:

Volatility can also become the cornerstone of a portfolio, offering the desired risk profile, especially in a 60/40 portfolio. Managed effectively, volatility can complement the portfolio’s performance and enhance the overall risk management strategy.

Factors Influencing Volatility Trading:

The white paper indicated that volatility trading is poised for substantial growth as more firms contemplate adopting this asset class. The success of new volatility contracts will heavily rely on index methodology, a key component that market participants closely consider. Furthermore, the increasing popularity of short-dated options trading is expected to impact expectations for listed volatility products and their calculation methods.

Conclusion:

The white paper I found on the MIAX website shed light on the evolving landscape of volatility trading and the potential for new volatility products, like SPIKES Futures, to reshape the industry. As interest in volatility trading grows, it becomes imperative for traders and asset managers to adapt to these changing market dynamics. Understanding the complexities and opportunities of volatility trading can be the key to unlocking success in this exciting and dynamic market. Embrace the potential of volatility products and explore the opportunities they present for your trading strategies and portfolio management. A link to the white paper can be found here.