How will VIX futures work? IISL answers

Nifty and India VIX are negatively co-related. The India Volatility Index was down 7 percent at 1130 (hours) when markets were up.  

Below is the interview of R Sundararaman, Chief-New Products of IISL & Dotex with Anuj Singhal and Ekta Batra etc on CNBC-TV18.

Anuj: This is the product which traders were waiting for long. If you could explain why you have chosen weekly expiries and not the monthly expiry which is the case with normal derivatives products?

A: As you rightly pointed out, this is a new product, this is on volatility index. India VIX is a volatility index being computed from Nifty option prices by NSE across all strikes, whatever bids are expressed by the market participants from that the volatility index is computed. The contract is going to be a weekly contract and there will be three weekly contracts. At any point of time it will be available.

If you look at the option trading in the market, the near month and the next month contracts are typically very active. The third month contract becomes active almost towards the expiry of the first month contract then the rollover starts.

Given the volatility profile of the market, given the short-term nature of the volatility profile and the nature of option trading in India, we felt that weekly contracts would be more suitable than monthly contracts. Moreover there has been a long pending demand from the market to have short-term option contracts in the market in the equity derivatives as well.

Probably when a new product is getting introduced trying such a requirement from the market participants would be most helpful. That is the reason for having a weekly contract.

Anuj: What kind of participation do you expect and would you be introducing options as well as we go along or for now it is only futures?

A: It will help market participants in hedging portfolios from unexpected volatilities. It will help option traders to augment their trading strategies and will also help people to take view on the volatility. As you have observed some time back, about the negative correlation and also about the behaviour of the VIX in the sense that when the market expects some volatility in the near future, VIX increases and vice-versa. VIX has a mean reverting capability which typically it exhibits repeatedly.

Given all this we feel that all the types of market participants whom we talked about. People who want to take directional views or who want to hedge their portfolios or option traders should be finding this product very useful and very versatile as it is being found in many other exchanges internationally. With regard to the introduction of VIX options, what we feel is that typically whenever a new product is introduced in the market by the market regulator, market regulator generally starts with the futures.

Once the market starts understanding the product better, options get introduced. It should index futures, it came first and then came index options. Currency futures came first and then came currency options. So if you are seeing it when VIX futures start getting understood by the market and started getting traded very well, we will be able to request the regulators to consider introduction of VIX options as well.

Ekta: What sort of volumes are you expecting on this product especially going into something like the elections which would be a big event for the markets?

A: If you look at the volumes part of it, it is a long felt market need that we have introduced this product. In our interactions with the market participants since the issuance of a circular, the response from the market has been extremely supportive and good and very encouraging.

How much it will translate into exact volumes that will be very difficult to predict. What I can share with you as an experience with regards to volumes in respect of any new products is like this. When we introduce a new product, on the first day, second day and the first week you find extremely high levels of volumes because all the market participants would like to trade this product and see how it works.

The novelty attracts more participants. After that the market sort of stabilises and the members start stabilising their systems based on the experience that they have made and then there becomes a consistent growth in the volumes. The growth is also dependent on various augmenting factors. In this case, some of those factors would be introduction of VIX options, having ETFs on VIX and all those stuff. That is first part of the question.

The second part with regard to the elections -- event-specific volatility spike is known everywhere in the market throughout the world. How much that spike would be and how much it will translate into trading activity depends on market perception on the impact that may arise out of such events.