Cboe Global Markets, Inc. (CBOE) Earnings Call Transcript & Summary

[Audio Gap] futures products, which are slated to launch this coming Monday, October 14. My name is Natalie Reed. I work here at Cboe on the global derivative sales team. I cover the hedge funds in both the U.S. and Latin America. And I also have the pleasure of being our sales lead for our next generation of equity volatility products, of which VIX options on futures is the next slated to launch on Monday, as I mentioned. Joining us today to speak about VIX -- options on VIX futures, we have Rob Hocking, who is the Global Head of Product Innovation here at Cboe, and he is the Head of our Cboe Labs team, which is the team behind the creation of options on VIX futures. We also have Jacob Cavner, who is a trader at the Market Maker IMC; Lawrence Chen, who is founding partner and CEO of Golden Horse Fund Management, an investment management firm based in Singapore; and Megan Miller, Senior PM, Head of Systematic Edge Options and Co-Head of Custom SMA at Allspring Global Investments, which is a global asset management firm in the U.S. Rob is going to kick us off with an overview of the product we are launching with on Monday. After that, we will move into a moderated Q&A with our panelists. And after our prepared Q&A, we will have time to take audience questions. So please do submit your questions over the course of the presentation via the Q&A button or icon within your Zoom toolbar either at the bottom or the top, and we will get to those questions at the end of the session. In terms of timing, this will be a 30-minute webinar, so we will wrap right around 9:00 a.m. Eastern Time and 1 quick housekeeping item. All information and commentary from this webinar is considered on background and not to be used for direct attribution to the speakers or their respective affiliations. Compliance with these terms is mandatory for all media personnel and entities in attendance. Please reach out to cboecommunications.com, if you have any questions. And with that, I'll pass it over to Rob.

Excellent. Thank you, Natalie, and good morning, everyone. As Natalie said, please keep the questions coming in. This is for you, and we want to make sure we hit all the topics that are of interest. And so whether your outlook on the market is bullish, bearish, somewhat in between investors turn to VIX to better understand what volatility the market is pricing in. That's why Cboe is extremely excited to expand our franchise of tradable VIX products coming this Monday, October 14, like Natalie mentioned, with the introduction of options on VIX futures. Our suite of tradable VIX futures, cash-settled options, variance futures and now physically delivered options on VIX futures, I know that's all a handful to keep straight can provide market participants with the flexibility to hedge a portfolio or really to employ strategies to generate returns from differences in broad-based market volatility, which you'll hear more from our guests on this webinar. So by adding a mid-curve style option, mid-curve in the sense that these options expire before the future that they settle into, VX options will allow us to better answer the demand that we're hearing from customers. Mid-curve style options are already a well-known tool and available in many other asset classes. But when utilized as part of the VIX product suite, they can really provide a whole host of benefits. A few of them just weekly listings of options on a very liquid front month VIX future. We can answer the growing demand for shorter-dated options by listing daily VIX option expiries, providing more granularity and really smaller premiums to trade. More data points on the vol term structure and price discovery leading to really better risk management for users. And then VIX options will be PM settlement as opposed to the cash version AM settlement of our existing VIX options products. And then really, the possibility, as I mentioned, it's more granular short-term view on forward volatility, which is a lot of the demand that we've been hearing from the market. And so moving to the next slide. With futures as the underlying asset, these options will be CFTC regulated, enabling a new wide variety of market participants that are restricted from accessing U.S. security-based options today. It will provide them a product to express their views on equity market volatility. And as you can see from the slide, the initial listing schedule, we intend to offer daily expirations. That's probably the biggest change with regards to VIX options and what these will allow us to offer. We'll begin with the 5 daily contracts with the addition of the following 2 Fridays for users looking for a little additional optionality a bit farther out on the curve. And it might be good to highlight, we get a lot of questions on what's the difference between your existing VIX options and the VX options that you're listing. And some of the bigger ones, as I've mentioned, settlement is a big one. VIX options today, the cash-settled version are AM settled. The VX options, as you'll hear us refer to, are PM settled. So they will settle using the daily VWAP process that we settle each and every day the VIX futures too. The settlement type on VIX options are cash settled, the VX option will be physically delivered. So another very big distinction. You will actually get delivered at expiration, the underpinning VIX future that it's tied to. The exercise style is the same. They're both European. And then the expiration date, some nuances there, cash settled VIX options are obviously the same as the future. They both settle on the same date with our opening settlement process in SPX. VX options, as I mentioned, will settle directly into the future, and they will do that on a daily basis. So with the VWAP at the end of each day, the one that's also utilized as part of TAS, you will be able to settle directly into the future. On the next slide, I want to dig a little bit deeper into the contract specs and really wanted to stress that VX options will never expire on the same day as the final settlement date of the underlying future. So every VX option will expire into the front month future at the time of expiration. Although when the VX option is listed, depending on the time of month, they may be listed at -- it's kind of confusing to say it may be listed into the second month future, but as it comes closer to expiry, it will expire into what is then the front month future. And hopefully, if there's questions on that, we can get into that in Q&A. But I wanted to highlight that they will always settle into the front month future. Also strike increments, this is a common question that we get. The initial strike listings, you can see half point intervals between 10 and 20, 1 point intervals between 21 to 40 and then 2.5 point intervals above that. We think that gives enough granularity for people to trade and what they've been asking us for without over, I guess, putting added requirements on our market-making community to quote strikes in every 0.5 point increment. Now I will add that the exchange has the ability to add more strikes as we go along. So as demand builds hopefully in these, if we get requests in to have different strikes listed, it is something that we can do, but we will kind of turn to the market and listen to them on what needs to be listed. On the next slide, our final slide, we have a resource hub online. It's the work of an amazing Cboe team. They've collectively constructed FAQs, additional information on contract specs. And these resources are being added to in real time. So we expect a few more to go up even today in preparation for Monday's launch. So really, please check it out. It's an incredible resource. This is something new that we've been trying to do with every product launch. It was very successful in the launch of our Variance Futures that we had on September 23rd, and now we're turning to Options on VIX Futures to make sure all that information is there in one easy place to consume. And so please frequent that page and dig through there if you have questions. And if you can't find the information, then obviously reach out to the Cboe team, and we can get you answers to your questions. And so with that, I really want to jump into the Q&A portion. And Natalie, I'll turn it back over to you.

Great. Thank you very much. So Megan, I would like to kick off Q&A with you. I would like, if you could please just give us a quick overview of your firm and how your firm utilizes options strategies in its portfolios?

Yes, happy to. Thank you, Cboe for having me today. I'm excited to be here and help celebrate the launch of your new product. So Allspring is a global asset manager, and we have over $0.5 trillion in assets under management, and our platform covers equity, fixed income, alternatives, which include our option-based strategies. So our option origins go back to the 70s and then we started writing covered calls on single names. Fast forward to today, we're still doing that, and we see that for a big demand from our retail clients looking to write calls on single names. Now because we're talking about VIX, we also have a lot of institutional and other retail clients that are interested in VIX strategies, protection-based strategies. And so that's where we focus our VIX solution set. And so we're active managers that we follow a systematic process, and that systematic process is very rules-based, transparent, and we do that to make sure that we are transparent with what we're doing. And so we're excited about this new offering because it helps us be -- it helps us follow that rules-based approach better, specifically when utilizing VIX.

Great. Jacob, I want to move on to you from the market making perspective. How do you -- how would you describe the liquidity profile in VIX futures and VIX options today?

Yes. I think both VIX futures and VIX options are overall in a pretty healthy spot from a liquidity perspective. VIX futures are one of the most liquid volatility products in the world, the ability to have constant volatility exposure without the need to roll strikes, I think, is pretty powerful. VIX options, I also think are in a pretty healthy spot from a liquidity perspective. I think that the penny tick size introduction to the options screens has overall tightened the markets a little bit and made them more liquid. As always, the VIX option pit is healthy and alive as well.

Good to hear that. Lawrence, you are based overseas in Singapore. Thank you so much for joining our webinar. I know it's late for you there. I wanted to -- we really wanted to have someone from APAC region on because part of the reason why we are bringing these options on futures to the futures exchange to CFE is to give access to our global clients who maybe are unable to connect to the securities and options exchange for whatever reason and have an easier time facilitating trades on the futures exchange. So I wanted you to explain a little bit about how your firm accesses volatility trading today and how Cboe's new options on VIX's Futures product will facilitate access to trading volatility for the APAC region.

Okay. Thank you, Natalie for having me. So good morning to everyone, and good evening to Asia. So Golden Horse Fund Management, we've been around for the past 10 years. So we have 2 funds, which is Global Macro and the Bulletproof Fund. So we look at 2 spectrum of the theorists, which may lead from equities to bonds to commodities and to FX. So to us, being able to have an instrument like VX futures options to hedge to end of the tail risk, the tailness of it is quite important to our traders. As we are trading on the medium frequency, we do not need to be able to settle on a daily basis. So the long bias to us which the VX options futures that's going to be launched should be an instrument that is quite interesting to us. So that's something that we are quite excited to understand more.

Yes. Definitely. And Rob, I want to bring it back to product design a little bit. You talked through all of the integral product specs that we've been engaging with clients on to try to bring the best option to market on the 14th. In terms of product design with listing the front 5 days and the 2 weekly Fridays, what has client feedback been on those being the expiries at launch? And how did we land on launching with those expiries?

Yes, it's a great question. And really, this was to answer the customer demand. Obviously, short-dated option trading has really hit the market in full storm over the last few years with daily expiries in SPX you could see the logical progression, people started asking for daily expiries in VIX. When we launched the one day VIX, that was kind of in response to this, capturing the movement of kind of that daily move in the form of an index. But people said, "Hey, can you list a future on the 1-day VIX." That wasn't really possible just due to how the VIX is calculated, the nuances of it, listing a future on that wouldn't have been good for the market, in my opinion. And so with the ability to launch a physically delivered option, it gave us the ability to launch a daily contract, and that was really the onus around the first 5 days. Let's start with the first 5 days. That's where the majority of the volume trades in SPX. I think right now, we're still hovering around 47% to 48% of SPX options trading on the day of expiration. And so by offering this kind of 5 days a week, we, once again, the burden on liquidity providers was small. It's only 5 days, and we wanted the additional 2 Fridays just to give some longer-dated options in case somebody wanted to trade a little bit longer dated, but really focusing on that front 5, it was just answering the customer demand of shorter-dated trading.

Definitely. And I think the feedback that we've gotten is that granularity helps our clients be a lot more surgical in their approach to trading volatility, which, as you mentioned, was something that we were seeing in SPX options already.

Yes. It also helps with -- it's a new kind of risk characteristic on the term. You're not cannibalizing something that already exists. We're not -- it's slightly different in many nuances to the actual VIX options that we have. But now you have a shorter dated product, you have the traditional VIX options where we have a lot of liquidity in it. As Jacob was talking, you have the future side, like it really rounded out the product suite well. .

Good. Megan, you spoke a little bit about how your fund utilizes options strategies in your portfolios. Can you explain how your strategies could utilize this new options on VIX futures product and why having access to new listed products like this one is important to you and your fund?

Yes. So we -- I expect to utilize these new products in our institutional accounts and mainly for our protection based strategy. So we run a number of strategies, income focused, protection, tail-risk focused. And for any of those strategies, it's important for us to be able to deliver performance that the clients expect, especially in the institutional space, mainly because we have boards that we're reporting to and clients that really demand that the strategy performs as we've shared and as they expect. And so one of the reasons and one of the ways that we do that is mitigating the risks associated with nonlinear strategies. And mainly, what's important for us to measure is the granularity and structure the granularity of the product such that it performs as we expect and as we intended to do. And so for us, it's important to create a portfolio that has the exact granularity that we're seeking. And so this new product helps us get there. We're also excited that the VIX options on futures are on futures and not on the index. And so we have found success with options on futures. It's a new area that clients have been leaning towards and for a number of reasons. But the fact that these options settle on the future is exciting. And what I particularly like is the PM settlement. So a number of our options expire in the PM. So it's always a difficult conversation to have. Well, our VIX option started in the morning and then the big spike and then we didn't capture it. And so now with everything settling in the PM in our portfolios, it just helps. Again, form those expectations so that we could be deliberate and experience for our clients, that's what we intended and expected to be.

Yes. And I love your comments regarding the fact that these are options on futures because we have really been leaning into with variance futures that launched in September and a couple of products that we're bringing in 2025 really building out our futures products, on our CFE, Cboe Futures Exchange, leaning into that client demand for more futures-based strategies. So I'm glad that you mentioned that. Jacob, getting back to you, how do you anticipate the new options on VIX futures product will help to further round out your volatility toolkit, so to speak, and specifically, what new benefits do you see this providing that the existing products in the market, maybe some of the ones that Rob touched on and what you had mentioned, comparing and contrasting liquidity don't currently offer now.

Yes. So while I think that the VIX options market is in a healthy spot from a liquidity perspective, but I think that there are a couple of chinks in the armor. And I think that the new VX options are really -- at least partially designed to address those. So I think like the 2 really intriguing features to me about the VIX options are, as been mentioned by Rob and Megan, the physical settlement and then also the price time nature of quoting. So from the physical settlement side of things, the fact that these options are going to be expiring into the quite liquid monthly VIX features, I think, is really quite important. We already have the weekly VIX options that exist already, and they expire at the same time as the weekly VIX futures, but quite frankly, the weekly VIX futures are just not that liquid right now. And I think as a result, as an options market maker, when your primary delta hedging instrument is pretty illiquid. What do you have to do to account for that risk is you have to widen out your options markets. And I think that's sort of what we're seeing with the already existing weekly VIX options. And yes, I think that the fact that the VX options are going to be expiring into the monthly VIX futures will just make it easier for options market makers traded. From the price time quoting, I think that, yes, like market makers, I think, can be more incentivized to tighten on price time quoting expiries and there are definitely benefits to pro rata quoting as well. Market makers are just more incentivized to put more size in the bid and the ask. But I think it's really nice when a fund like VIX can have certain expiries that are price timed and then certain expiries that are pro rata as well. So similar to how an S&P 500, you have SPXW and SPX price time and pro rata. I think that just the different styles of quoting will just enable VIX to satisfy the needs of more customers. What exactly this new VX instrument is going to be introducing, as Rob mentioned, it's going to be a lot more targeted towards gamma. I think that giving customers and market makers, the ability to really isolate that exposure is important. The monthly VIX options that sometime in the month, they are pretty gamma intensive, but also for a good amount of the month they are not. And there are a lot of other factors that can really dictate the P&L of some of those longer duration options. That's not gamma. So yes, I think that it's going to be really nice to be able to just more clearly isolate that exposure consistently.

Yes. sure. Lawrence, by bringing options on VIX futures to CFE, as I mentioned, Cboe Futures Exchange, how do you see the VIX liquidity pool and accessibility further expanding into the APAC region? And what opportunities do you see this providing as we move forward?