by Jeffrey Lin
On The CBOE Floor: S&P Index Options Pit & VIX Pit
[Continued from Part 1: A Morning at the CME/CBOT Trading Floor with the Mr. Topstep trading desk]
We left the CME/CBOT trading floor sometime after 11am CST with Andrew Coffey when he had finished filming Mr. Topstep with Danny Riley. We grabbed lunch with Andrew at a McDonalds near the Sears tower, then Shane and I headed to the CBOE for our scheduled tour with CBOE instructor Russell Rhoads. I had worked with Russell before on the 3Gurus event presented by the CBOE last November.
[CBOE entrance, Van Buren Street]
The CBOE is right across the street from the CME on the south side. We started upstairs, leaving our bags and getting our CBOE jackets that were required on the floor. Looking down on the CBOE floor through the windows, it seemed much smaller than I expected from the pictures I’ve seen. From upstairs, you see rows of computer monitors hanging above the CBOE floor but below us. Unlike the CME floor, the CBOE is square.
[we didn't take this photo, but this is the view we got from upstairs at the CBOE. Each circle of computer screens is a pit.]
Arriving downstairs on the floor, the place was mostly deserted. It felt like being at a convention that had ended, many areas and stations completely empty except for the chairs, desks, and disconnected computer screens overhead. The only activity was in the S&P index pit by the wall on the opposite end of the floor. We cut across the center walkway on the floor, passing by 2 or 3 pits with a few people in it.
At the S&P index pit, traders stood on the steps of an amphitheater while the “stage” area with 2 adjacent rows of broker screens & benches. The pit was filled with over 200 traders standing shoulder to shoulder, shouting and signaling trades to each other and the brokers. Russell explained that most, if not all, of the traders in the pit worked for funds and LLC’s in and around Chicago that most haven’t heard of. No trader in the CBOE pits traded for themselves anymore. The way the traders in the pit traded were using delta-neutral strategies. They bought or sold options in the CBOE pit, then immediately hedged their position with S&P futures by calling their partners across the street at the CME S&P futures pit and desks. If they were long 1 delta of S&P index, they would short enough S&P futures contracts so their net delta is 0. They do both these transactions almost simultaneously, so they have to be in constant contact with their company and partners at other trading locations. This is definitely a high-stakes high-intensity team sport. The traders signaled simple and complex option trades to each other constantly. These pit traders look for when the value of the S&P 500 index cash, S&P 500 index futures, and S&P 500 index options diverge briefly and make trades to profit from this arbitrage opportunity. Arbitrage opportunities can disappear in a split second, especially in an electronic trading age, so the few traders who can make it in the pit are the cream of the crop, able to respond and trade at such a speed. While economics learned in school say markets are efficient and you can’t make money from arbitrage opportunities, it is much different in the real world. These traders do so every second of every day.
Andrew met us by the S&P pit to take us over to the VIX pit and introduce us to Jamie Tyrell, which many of you have seen on the daily Volatility Sonar report by OptionMONSTER. The VIX pit was located on the center of the trading floor away from the S&P pit. Unlike the S&P pit, the VIX pit wasn’t raised up just a flat area where about 10 traders sat at 2 rows of computer screens. Jamie sat in a lower level across from the 10 traders so they could do business with each other. The space was much more open than the conditions for the traders at the CME, but felt more cramped overhead with all the computer screens hanging above. We talked to Jamie for a second. It felt like just visiting someone at their office until the other traders received their trading orders and stood up from their desk to shout and signal to Jamie their trades. These guys were no more than 5 feet from Jamie. Unless you know options hand signals well and where the market is and what the orders are, it is hard to tell what is happening.
Jamie explains that even with just 10 or so people, they still need a pit and do trades directly with each other because these are gigantic trades. It would be impossible to do these trades electronically and not disrupt the market. This is why Jamie’s Volatility Sonar is so important. He is one of the few people to sees and trades the largest (and thus most important) VIX options trades that others don’t see. He has the pulse on the VIX and market volatility, which is important to all traders and investors, whether you’re into options or not.
[Jamie's Volatility Sonar Report from this day Thursday, May 20th, 2010 recorded that morning before we met him]
This ended our brief tour of the CBOE floor. Shane and I were ready to head back to the CME/CBOT floor to see the final hour of trading there. But guess what? Waiting for Russell’s next tour of the CBOE was the Chicago Bears’ punter Richmond McGee from University of Texas. He’s known as the Bears’ punter, but he also works for Merrill Lynch and thus wanted to see trading in action on the CBOE floor.
Part 3: Back to CME floor for Final Trading Hour on Thursday, May 20, 2010.
Part 1: A Morning at the CME/CBOT Trading Floor with the Mr. Topstep trading desk
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