As market volatility continues to make headlines, many investors are looking for ways to turn the chaos into profit. While the CBOE Volatility Index ($VIX) is a popular tool for tracking market fear, it can be a tricky instrument for retail investors to trade. Luckily, there’s another option worth considering: buying shares of Cboe Global Markets (CBOE), the company behind the VIX itself.
Deutsche Bank recently upgraded CBOE to a "buy," pointing to potential revenue growth as demand for index and volatility options rises with the ongoing market turbulence. This surge in volatility, fueled by economic uncertainties and the recent U.S. elections, has created a perfect environment for derivatives trading.
With volatility likely to stay high in the near future, CBOE is well-positioned to benefit. The company’s core business is growing steadily, with equity derivatives seeing a 2.3% year-over-year increase in Average Daily Volume (ADV) to around 15.156 million contracts in Q3 2024. On top of that, CBOE’s low leverage and strong cash flow give it plenty of room for growth and potential acquisitions.
Plus, CBOE has a solid dividend track record, having increased its payouts for over a decade. This makes CBOE an appealing option for investors who want both growth and income stability during these unpredictable times.
So, instead of tackling volatility plays within the VIX complex, let’s explore why it might be worth considering CBOE itself as a dividend-paying stock that stands to gain from today’s volatile market.
Unpacking CBOE's Financial Health
Cboe Global Markets, Inc. (CBOE) runs the biggest options exchange in the U.S., and offers a variety of trading and investment tools across different markets. As the company behind the widely followed VIX index, CBOE benefits when markets get volatile, which tends to boost trading in options and futures as investors seek out hedging instruments.
In the face of a generally bullish stock market this year, CBOE has delivered steady, yet modest, gains, up 12.4% in 2024.
In its latest earnings report, CBOE showcased a robust performance with diluted EPS of $2.07, up 6% year-over-year, and a record adjusted diluted EPS of $2.22, an 8% increase. This growth was supported by record net revenue of $532.0 million, marking an 11% rise from the previous year, showing how well CBOE is positioned to take advantage of market volatility.
Looking at its valuation, CBOE’s forward P/E ratio is 22.97, a slight premium to its historical average of 20.25. Given Cboe's unique market position and wide moat, this premium valuation seems justified - particularly with market volatility expected to ramp higher after the election, in keeping with its usual pattern.
CBOE's Market Position and Expansion Strategy
CBOE has been making some smart moves lately to take advantage of market volatility and grow its business. One big step is its partnership with Robinhood (HOOD), which will bring CBOE’s index options—like the S&P 500 ($SPX), VIX, and Russell 2000 options—to Robinhood’s huge base of retail investors. With more everyday investors getting into options trading, this partnership could really boost CBOE’s trading volumes and revenue, strengthening its position in the derivatives market.
Cboe is also teaming up with FTSE Russell to launch cash-settled index options tied to digital assets like Bitcoin (BTCUSD) and Ethereum (ETHUSD), just in time for the post-election crypto boom. This move into crypto shows that CBOE is thinking ahead, trying to meet the growing demand for safe, regulated ways to invest in digital assets. As the crypto market matures, these new products could attract institutional investors who want a reliable way to manage their crypto exposure.
On top of that, CBOE has been a consistent performer when it comes to dividends. The company has increased its payouts for 15 straight years, with a forward annualized dividend payout of $2.52 per share and a yield of 1.26%. With a low payout ratio of 34.33%, there’s plenty of room for future dividend growth while keeping financial flexibility. This mix of growth potential and reliable dividends makes Cboe stock a solid choice for long-term investors looking to benefit from market volatility.
Analyst Perspectives on CBOE Stock
CBOE’s outlook looks bright, especially after the company raised its 2024 revenue growth forecast to 7-9%, up from the earlier estimate of 6-8%. This boost shows confidence in CBOE’s ability to take advantage of market volatility and grow its business in areas like derivatives and data solutions.
Deutsche Bank analyst Brian Bedell is also optimistic, predicting further revenue growth of 8% in 2025 and 6% in 2026, which is higher than previous estimates.
Overall, CBOE has a "Moderate Buy" consensus rating from 17 analysts. Out of those, 5 rate it as a "Strong Buy," while 12 recommend holding the stock. The average price target is $213.81, indicating expected upside of about 6.5%. Deutsche Bank set a target of $222, implying a premium of more than 10%.
Conclusion
The case for CBOE as a volatility play becomes compelling when you connect the dots. Rather than trying to time market swings with VIX-based products, investors can tap into the company that actually benefits from higher revenues driven by market uncertainty. With robust financials, strategic expansions into retail and crypto derivatives, and 15 years of dividend growth, CBOE offers a smart way to profit from market volatility. For investors seeking exposure to market volatility without the complexities of VIX derivatives trading, CBOE presents an attractive opportunity to capitalize on market uncertainty while collecting growing dividend payments along the way.
