The launch of one of the most highly anticipated financial products will take place Friday, when trading begins in the Chicago Board of Options Exchange's volatility futures. Although the concept of volatility-related investments is becoming more widely known, related products and trading has remained a domain occupied by a niche of professionals. But as I discussed in a
recent article , the important step was establishing volatility as a distinct asset class and making it widely accessible to the investing public. While pros and hedge funds have been trading "variance contracts," these are mostly custom-made products where the transaction occurs "upstairs" between two willing parties. Volatility futures will be the first market that uses a true open-price discovery system. A pair of articles last week by RealMoney contributor Paul Haber provided an excellent analysis of volatility index (VIX) futures. He not only discussed the futures' applications but exposed their limitations, including such intricacies as the ability to hedge front-month vega (the rate of change of an option's value relative to a change in volatility) but not gamma exposure (the rate of change of an option's value per unit change in the price of the underlying stock or index). It may also be useful to wade in from the shallow end of the pool and make sure we have a broad picture before it starts trading. It also means that if the VIX rises 1 point to 21, the VXB's value will increase from 200 to 210, and one VXB futures contract will gain or lose $1,000 per 1-point move in the VIX. Be aware of the leverage involved with futures -- it cuts both ways.