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**Special Feature from the CBOE's Options Institute**

Russell Rhoads, CFA is an instructor with The Options Institute at the Chicago Board Options Exchange. He is a financial author and editor having contributed to multiple magazines and edited several books for Wiley publishing. In 2008 he wrote Candlestick Charting For Dummies and is the author of Option Spread Trading: A Comprehensive Guide to Strategies and Tactics. Russell also wrote Trading VIX Derivatives: Trading and Hedging Strategies using VIX Futures, Options and Exchange-Traded Notes. In addition to his duties for the CBOE, he instructs a graduate level options course at the University of Illinois - Chicago and acts as an instructor for the Options Industry Council.

As we are approach the end of the first quarter it is time for market participants to reflect on the first three months of 2013. For me that means looking at what has been up with volatility trading. I knew that the CBOE Volatility Index(VIX) Futures, Options, and Exchange-Traded Products arenas had been busy, but I had no idea until I looked at the numbers just how busy they had been.

Before jumping into the dramatic increase volumes for volatility derivatives, I want to put the beginning of 2013 into a little context. The table below shows the average close for VIX, closing high, closing low, and high-low range for VIX for 2007 through 2013. Of course 2013 is incomplete and is based on trading through March 21, 2013.

What stands out for 2013 is the narrow range relative to the other years on this table. For me the range of VIX is more important that year over year change. Implied volatility should never rally 50% for a year, but should stay in some sort of range. A range of 7.69 for VIX and all of 2013 staying in a narrow range (so far) is more significant to me. What surprised me was that the trading volumes the market has been experiencing despite this relatively narrow range for VIX.

First, the bar chart below is the average daily volume for VIX Options trading for 2006 through 2013. Notice the volume increase has been almost parabolic each year since the financial crisis in 2008. The average volume for VIX Option trading so far in 2013 is 637,687 contracts. In 2012 the average volume was 444,565. So far, the yearly average volume is tracking at a 42% year over year increased relative to last year.

The next market I took a look at was the VIX Futures market. VIX Futures trading was introduced in 2004 and average daily volume for both 2004 and 2005 was less than 1,000 contracts. That is why nothing appears to show up for those two years on this bar chart. 2013 average volume for VIX Futures trading is 154,791 which compares to average daily volume of 95,142 in 2012. I also found it impressive that so far the lowest volume day in 2013 is 100,379 contracts.

Finally, I took a look at how trading has been for the iPath S&P 500 VXI Short Term Futures ETN which is commonly known as the VXX. VXX allows traders and investors the ability to gain volatility exposure through a portfolio that holds the front two month VIX Futures contracts. VXX was introduced in 2009 and has taken off in popularity over the past couple of years. Average VXX volume in 2012 was 146 million shares a day. So far in 2013 average volume is running at over 443 million shares. That is an increase of just over 200%!

So far in 2013 VIX has been in a pretty narrow range, but you would not know this from the trading volumes in some of the most popular methods of gaining exposure to volatility. The year is just about one quarter over and even in this low volatility environment more traders and investors are using VIX Options, Futures, and ETPs to diversify their portfolios through gaining exposure to volatility. Volatility has become established as an asset class and the market continues to grow despite the low volatility environment.

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