Why VIX™ Index Options and Mini VIX™ (VXM) Futures Got a Tick Update

November 16, 2022

By Arianne Adams, Senior Vice President, Head of Derivatives and Global Client Services, Kristin Boyd, Vice President, Derivatives Sales, and Anthony Montesano, Vice President, Market Structure

We hear you. After extensive conversations with our market participants, we recently made changes to some of our volatility products.

So, what’d we do? With the aim of increasing access for end users, we altered the tick increments for Cboe Volatility Index® (VIX®) options and Mini VIX™ (VXM) futures, which went into effect a month ago (October 3).

Specifically, VIX options tick increments went from nickels to pennies for bid/offers below $3 and from dimes to nickels for bid/offers above $3. VXM futures tick increments also went from nickels to pennies.

This change aligned VIX options with other products that have penny/nickel ticks. Meanwhile, VXM futures, by virtue of their smaller notional size, are meant to appeal to the sophisticated retail trading community – we found that interest in a smaller contract may have been dampened by nickel ticks. A .01 increment better matches VXM futures’ proposed purpose.

Liquidity in options markets goes deeper than the screen, but we know that the displayed price can be the industry’s best advertisement. The potential for a tighter bid/ask means folks can benefit from accessing more precise execution prices. On a psychological level, some investors may not want to cross an apparent .05 or .10 wide bid/ask, regardless of the product fit for a given portfolio.

And our data from the past month after the change already shows the impact on trading behavior, with spreads in the liquid front months across all moneyness ranges narrowing substantially. VIX options volume increased as well – October’s average daily volume of 584k contracts was the highest level since May 2022.

Below are top of book spreads for all OTM options in those front months:

Source: Cboe Global Markets Data

The above metrics reflect that liquidity providers have bought in and adjusted – our data showed that before the tick increment change, many trades already happened within the nickel/dime spread anyways. Other end-users have bought in, knowing that their hedges, rebalances and/or trading strategies will benefit when trading with the resulting tighter on-screen markets.

And smaller increments across instruments mean more granular price points for systematic traders looking to deploy strategies that might not have been feasible with larger tick increments, not to mention the access the smaller tick regime affords to the growing retail community.

This suits our vision of serving an ever-expanding, diverse group of market participants, while encouraging liquidity formation and trading activity throughout our volatility product suite. We’re working hard to not only listen to our customers, but also turn their feedback into action.

As markets continue to evolve and volumes heighten, we will continue to listen to our customers, stakeholders and partners about how we can improve the trading experience (throughout a trade’s lifecycle!).

See the Trade Desk notification for more technical information on the VIX/VXM change.

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