JPMorgan analyst Kenneth Worthington has downgraded Cboe Global Markets Inc. to "neutral" from "overweight," as he has concerns that investors could shift away from volatility trading products offered by the exchange operator.
The recent spike in the volatility has led to a significant erosion in the market value of certain exchange-traded products designed to short Cboe's Volatility Index, or the VIX, a measure that gauges market anxiety. Investors including asset managers had piled into products that allowed them to bet against volatility as markets registered consistent returns for a long period.
But the VIX has jumped since Feb. 2, making "short volatility strategies" unattractive. It could hurt the company's revenues and earnings if investors avoid using VIX-related futures to hedge positions in the future, the analyst said. He estimates VIX futures and options contribute about 25% of total revenues.
"With short volatility strategies under pressure, we see risk that CBOE volumes could come under pressure" in one or two months if investors move away from short volatility products, the analyst said.
CME Group Inc.'s e-mini may enjoy greater appeal among investors if they look to hedge against risk, according to Worthington. He lowered his price target on Cboe to $110 from $131.
