Marty Kearney Of The CBOE Group Discusses New Volatility Index And Saturday Expirations

On Monday, Marty Kearney of the Chicago Board Options Exchange joined the Benzinga #PreMarket Prep broadcast.

Kearney, a graduate of Wharton School of Business is a former independent Market Maker trading equity options who later founded Registered Options Principal, a brokerage firm based in Chicago. Kearney is also the co-author of Understanding LEAPS and a contributing author of Options: Essential Concepts and Strategies.

Currently, Kearney is a Senior Instructor of the Options Institute at the CBOE and offers basic to advanced seminars for individual investors, institutional investors, financial advisers and other audiences.

Without wasting any time, Kearney was immediately asked about the CBOE Short Term Volatility Index (^VXST) which provides a market-based gauge of expectations of nine-day volatility. This contrasts with the more widely known Volatility Index (^VIX) which measures expectations for a 30-day volatility.

Kearney explained the Short Term Volatility Index is based on the weekly S&P 500 options and offers a “real-tight snapshot” of what volatility is today.

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“It's interesting to look at the two of them, when you compare the Short-Term VIX and the regular VIX, there is no fair value,” Kearney said. “It could trade at a higher value than the VIX or a lower value than the VIX so it is much more sensitive to the temperature of the market.”

Not surprising, volume of the Short Term Volatility Index tends to spike higher on Fridays, especially on options expiration days.

Moving on, Kearney updated traders and investors over the CBOE's initiatives to move options settlement date to Friday, instead of Saturday.

Expiration day for many existing equity options and index options has typically been the Saturday immediately following the third Friday of the expiration month. After February 15, 2015, the expiration date will be officially moved to the third Friday of the month for all equity and index products.

Every new product currently being added expires on Friday. The effects of this move are still being studied.

Kearney explained that the only possible issue arising from the shift in the expiration date is the fact that a trading platform or software may or may not count the Saturday as part of the number of days remaining until expiration.

“It's more of a technical thing,” Kearney said. “Hopefully it will eliminate any confusion. If we ever do go to something more often than the weekly settlement, we aren't going to have a Tuesday option settling on Wednesday.”

To conclude, Kearney explained what he is seeing in the VIX right now.

“I'm seeing a little more calmness than maybe there should be,” Kearney said with a not so optimistic tone. “Just because volatility is low, doesn't mean that it can't stay low, or go lower.”

Kearney sees at some point a pop-up in the VIX and a downturn in the market.

Kearney offered no commentary on when (or how much) a downturn in the market might occur. In the meantime, Kearney sees a lot of inexpensive spreads that traders and investors could utilize to hedge a portfolio or take advantage of a downturn in the market.

Check out the video below for a recap of Marty Kearney's guest spot: