The stock market has been on a historic bull run, which has been great news for a lot of investors. It's even been good news for a company like Cboe Global Markets (NYSEMKT:CBOE), which itself is a market. Cboe Global Markets, based in Chicago, is one of the world's largest option markets, offering trading for options, futures, U.S. and European equities, exchange-traded funds, and other investments across multiple geographies. Founded in 1973 as the Chicago Board Options Exchange, it's best known for its Cboe Volatility Index (VIX), which measures stock market volatility.
The company makes most of its money facilitating options trades through its various products. Options allow investors to buy or sell a stock at an agreed-upon price that's lower than the established stock price for a specific time frame. Options are often used by investors to reduce risk, as they enable them to buy shares at a lower price.
Over the past 12 months, Cboe's stock price is up about 24%. The stock has proven to be a good option for investors over the last few years, but with many predicting the VIX to be more volatile in 2020, what does that mean for the company that owns VIX?
Why market volatility is a good thing
Market volatility is typically good for Cboe's stock, as it prompts more trading and hedging activity by investors. That was the case in the third quarter of 2019, as the economic uncertainty that spurred the Federal Reserve rate cuts and the ongoing U.S.-China trade war led to increased volatility. As a result, index options volume increased 13% year over year in the third quarter. In turn, options net revenue was up 10% to $146.5 million year over year, due primarily to higher revenue from net transaction fees.
Overall, net revenue was up 9% in the quarter to $294 million while operating income was up 17% to $147.4 million. The operating margin, which is how much a company makes on each dollar of revenue after expenses, is 50.1% -- up 350 basis points from the third quarter of 2018. Further, EBITDA (earnings before interest, taxes, depreciation and amortization) increased 9% to $191.6 million.
The company also just completed a massive technology integration project, which gives customers a single trading platform across all of its markets. On the third-quarter earnings call, Cboe CFO Brian Schell said the new platform includes better risk control for customers and eases the trading process. Company officials believe it will facilitate more trading over the long term as customers get used to it, in turn generating additional revenue opportunities.
Investing for long-term growth
With the integration now behind it, Cboe will shift its focus to developing new technologies and products. At the top of the list is a research and data platform designed to provide customers with data analytics capabilities so they can make better investment decisions. The data platform will also be used to guide the company in developing new product ideas.
These initiatives give investors even more reasons to like the direction of the company. In addition, the anticipated higher volatility in the stock market in 2020 should be a positive for the company. Cboe has been a good long-term growth story for investors, and there's no reason to view it any differently right now.