i missed the expiration part. but that makes your strangle and straddle worthless from the beginning. that's why i think you are looking for a futures type product. i think like the vix future and not the vix options. that gives you vol exposure, no greeks, etc., however you can't really make them expire that the same time. vol goes to zero, so your future would go to zero if expiring on the same day. however having a different expir would still give you something to get the same exposure to vol.
Yeah I like the idea too, but if it can't be hedged, all it does is turn underlying directional exposure into vola directional exposure. That may not be a bad product even with this flaw, but it would have to be understood that there did not exist a like contract hedge for the product. If people did not mind that there was no direct hedge of this product, it would be extremely useful trading venue, imo.
Just to be clear, I don't have a problem with the product. Like I said, I'd certainly use it. But I've just been looking at too many dead products recently... look at CBOE's VT, for example. My belief is that a product won't succeed unless: a) there's an arb-identical product with very high liquidity, b) there's some *huge* unfulfilled pent-up demand/supply for this product. By way of comparison, I think VIX futures are huge successes because it has both A and B. I think individual VIX futures are more difficult because it lacks A, and B is probably less pressing.
So you are saying, don't do a CATMFS product, make it an index like the DOW that doesn't trade, and then do a futures on that index like YM on the DOW index. Hmmm, that may work I have to think it through. My initial reaction is that all that does is hide in complexity, that this future on the CATMFS index is just exposure to directional vola moves. No different than my originally proposal. For example, there is no way to hedge this product either with a like contract. I guess you can have options on that future, but now this has gotten really messy. Still it may be a neat product.
Maybe there is absolutely nothing wrong with this product, and the only thing we have to change is, "Suggestion to the CME" not "Suggestion to the CBOE". These would be Single Stock continous ATMF straddle index futures. A mouthful, but a badly needed product. The product does exactly what I want it to do, directional exposure to vola without "underlying" (underlying of the underlying of the index) exposure.
vix futures are traded at CBOE. OneChicago is for single stock futures, another great idea with cripplingly low liquidity and wide spreads.
Nitro, nice idea. I do wonder, however, if the product is so perfectly correlated to vola, and this has historically returned to a mean level, what would keep the product from getting distorted or over sold by the biggest money on the street. This could force a reverse hedge to the underlying ATM instruments and cause usual pricing in the ATM which would then be forced to trade this off somewhere in the market. Sounds like this could be problematic in fast markets like the VIX expiration of OCT 08. Otherwise, its an interesting study. Retail traders could locally do the same with a gamma neutral options position which is made delta neutral by use of the underlying, but as aforementioned, it'll only remain neutral over a near set of strikes. Could be neat to play this off a back month or leap set, or consider long your vola instrument and long calls - basically a vertical or diagonal back spread, but interesting and easier to understand.