Cboe Global Markets (CBOE 2.05%), already the owner of the largest options exchange in the U.S. and the biggest stock exchange in Europe, is expanding its derivatives business overseas. On Dec. 10, the company -- which makes most of its revenue through transaction fees on options trades -- announced that it will be launching futures and options trading on equity indices in Europe next year.

It's doing so through the acquisition of EuroCCP, an equity clearing and settlement organization that works with 18 European markets covering 95% of the continent. David Howson, executive vice president at Cboe Global Markets and president of Cboe Europe, noted that the volume of options trading in Europe is currently just 8% of that in the U.S., meaning there's a great opportunity here for future growth for Cboe. That said, the acquisition and expansion are expected to dampen earnings in the short term, for up to four years.

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A record 2019 for trading

Cboe set a new record in average daily trading volume in 2019, with the Cboe C2 Options Exchange (C2) reaching an all-time high of more than 681,000 contracts per day, up roughly 13% year over year. The company's EDGX Options Exchange also set a record in 2019, with average daily volume of more than 531,000 contracts, a 12% increase for the year. 

As the number of trades increases, so do Cboe's top-line revenue growth rate and earnings per share. Third-quarter 2019 adjusted earnings reached $1.29 per share, an impressive 22% increase from the same quarter in 2018. Market share is also increasing, with Cboe's options business making up 39% of all options trades, up from 36.8% in the third quarter of 2018. The EuroCCP acquisition should increase global market share even further.

Hedging strategies and daily volume

Net income is also increasing at Cboe, from just $99.4 million in 2010, the year it went public, to more than $427 million in 2018. Increased hedging activity as the Dow moves higher is one reason. A hedge is an investment that protects your portfolio from adverse price movements, and options are often used for this purpose. Cboe also owns the VIX, an index that measures the volatility of the U.S. stock market. Options on the VIX are a popular form of risk management for some investors as volatility increases, which is good for Cboe.

Cboe's forward price-to-earnings (P/E) ratio, at 23.2, is lower than that of rival CME Group (CME -0.42%), at 28.2. The forward P/E ratio is a measure of a stock's current price divided by its estimated earnings per share, and investors of all skill levels use it to determine market expectations -- a higher P/E means higher expected growth. When we look at the price-to-earnings-growth (PEG) ratio, in which next year's earnings growth rates are taken into consideration, Cboe looks in line with other exchanges at 4 -- CME, for example, has a PEG of 3.5.

However, instead of focusing on typical price multiples with Cboe, keep an eye on the company's daily trading volume -- and on the overall volatility of the market. With potential higher volatility in global markets to come, Cboe could see an increase in revenue, and long-term shareholders will benefit from the increase in average daily trading volume that corrections and pullbacks provide. Cboe is also wagering on more global volatility to come with its acquisition of EuroCCP. With the U.K. finalizing a Brexit vote in Parliament, we could see higher global volatility as worldwide markets enter uncharted waters.