Why Cboe Is Plunging: ‘Retail Investors May Not Be Too Keen To Trade Volatility Anymore’

As noted earlier, Cboe is in a goddamn downward spiral on Tuesday on the heels of the dramatic moves in the VIX and the associated liquidation/termination/WTF moment for multiple volatility vehicles including XIV which fell victim to the dreaded “acceleration” event.

As harrowing as this most assuredly was, it was also entirely predictable. For months on end analysts have been screaming to anyone who would listen that thanks to the low starting point, even a nominally small VIX spike had the potential to force inverse and levered VIX ETPs to panic buy VIX futs, exacerbating the spike on the way triggering a flash crash. As far as the actual liquidation is concerned, it was clearly spelled out in XIV’s prospectus.

Anyway, folks seem to think there are going to be ramifications for Cboe itself because this is what’s going on:

Wells Fargo has some thoughts on that which we thought were highly relevant for everyone under the circumstances.

Via Wells Fargo’s Christopher Harris

The stock price of CBOE is down materially today. We attribute the weakness to a spike in volatility which has let to material losses in “short volatility “ strategies. Normally, spikes in volatility would be deemed to be good for CBOE (this is the first time we can recall where the stock price of CBOE is underperforming as VIX is spiking). But, the losses in  “short volatility” are so severe and it was likely such an overcrowded trade, the market is clearly worried about the negative implications for future VIX volumes.

We unfortunately don’t know how much of CBOE’s volumes are tied to short volatility strategies. However, VIX related volumes at CBOE have accelerated in recent years (VIX related volumes were up 20%+ in 2017) at the same time the “short volatility” trade was growing in popularity. It is therefore probably not unreasonable to conclude that much of the growth in recent years was being driven by “short volatility.” We suspect the retail investors that have been wiped out by this trade may not be too keen to trade volatility going forward.

If VIX related volumes were to go back to the level of 2015 (assumes recent growth in VIX is all short volatility related), that would be roughly 15% dilutive to our 2018E EPS. That is about in line with the decline in CBOE stock from recent peak to the current level (the S&P is down 7% over the same period). So, the recent down moves in the stock seem to be factoring in quite a lot of downside.

Long story short: “there’s always Target.”