Who Is Trading The VIX?
A breakdown of VIX options volume is illuminating. 75% of the VIX options traded over the past year were calls. This low put/call ratio reveals a bullish bias toward the VIX and a starkly bearish bias toward the broad market.
It also implies that the so-called "sophisticated" VIX traders are using the same strategies as their equity option counterparts - writing covered calls and speculating with naked long calls.
In fact, the sophisticated nature of the VIX customer is open to interpretation. While the vast majority of VIX traders are institutional customers looking to hedge volatility exposure, there are a surprising number of retail customers in the mix as well. Yes, you read that last sentence correctly. Retail customers are trading VIX options.
Retail Customers and The VIX
The exact percentage of VIX options traded by retail customers is difficult to ascertain. The opaque nature of options volume, along with the lingering debate over the definition of "customer," obscures the true numbers.
However, data from multiple brokerages along with the CBOE's own estimates (and mountains of anecdotal evidence) put the percentage somewhere between 10% and 20%.
That is an astounding percentage given the fact that VIX options are essentially derivatives of derivatives. It is also more evidence that the options industry needs to reevaluate its traditional definition of retail and institutional customers.
The retail popularity of VIX options came as a complete to surprise to just about everyone, even the designers of the product itself:
"We initially assumed that the VIX would be mostly institutional," says Dominic Salvino of Group One Trading and a member of the CBOE New Product Development Committee. "However, the game has clearly changed in recent years. There is clearly a subset of the retail market that is as sophisticated as any institutional customer out there. That was simply not the case a few years ago"
In Over Their Heads?
The question of whether this development is beneficial is still on the table. After all, retail customers have a nasty habit of getting involved with products that they don't understand.
The alarming proliferation of forex scams over the past year is a stark reminder of that fact. Even brokers that market VIX options to their customers are beginning to question the wisdom of such activity:
"The VIX saw a big retail adoption in 2007," says Randy Frederick, Director of Derivatives at Charles Schwab. "That’s interesting because it is such a complicated product. A lot of our retail customers think they understand this product. However, when I dig into the details of the product with them, I often realize that they simply don’t. I have to admit that is somewhat alarming."
