Wednesday, 15 August 2018

VIX adds short-term index

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  • CBOE S&P 500 short-term volatility index vs VIX

Surge in S&P weekly options drive demand for more responsive vol measure

A surge of interest in weekly expiration options linked to the S&P 500 has sparked the development of a new short-term volatility index. The CBOE last week added the new benchmark to its expanding VIX business as it awaits regulatory approval for new futures and options on the latest addition.

The CBOE S&P 500 Short-Term Volatility Index is calculated using VIX methodology but reflects a nine-day horizon compared to the 30-day horizon offered with the traditional measure of S&P options implied volatility.

Although the new benchmark is intended to provide a more responsive measure of short-term volatility for shorter-dated contracts with weekly expirations, similar products linked to the VIX itself have not been ruled out for future launches.

“VXST products do not preclude us from listing weekly expirations on our VIX product. Given the dynamic nature of short-term volatility itself, we elected to begin by creating an index calibrated specifically to measure it,” CBOE CEO Edward Tilly told delegates at the exchange’s risk management conference in Portugal last week.

“As the creator of Weeklys and VIX, we can’t help but be excited about the opportunities for innovation in short-term volatility trading and we see VXST as our first step.”

Average daily volume in S&P 500 options with weekly expiration has almost quadrupled since January 2012. August saw 220,000 contracts traded compared to just 57,000 in the first month of 2012. Part of that increase reflects a growing roster of products, with contracts out to five consecutive expiration weeks added in May 2012.

Low vol period

The new index has launched amid an extended period of low volatility, which has seen the VIX trade in a narrow band and rarely move above 20 since January 2012. By using a shorter snapshot of moves in options prices, VXST is more responsive to volatility spikes than its larger, more established cousin.

For example, in the period from January 2011 to August 2013, the VIX traded between a low of 11.3 and a high of 48. The short-term index however, traded in a much wider band, from a low of 10.2 and hitting a high of 68. Statistics from the CBOE show that the biggest one-day jump in the VIX through that period was 50%, compared to over 80% in VXST.

New VXST Weekly options will have the same expiration day and similar settlement processes to VIX futures and options, allowing investors to create strategies using the two indices to capture changes in the volatility term structure.

Since January 2011, the spread between the two indices – reflecting the difference between nine-day and 30-day volatility – has ranged between just over 4 index points and a maximum of 20 index points.

“We think this shorter time horizon sets the stage for some pretty compelling trading opportunities,” Tilly said at the conference.

“VXST Weeklys futures and options will enable traders to fine-tune the timing of their volatility trades. We envision investors using these products to pinpoint and hedge against event-driven market moves such as earnings and Fed announcements.”

Weekly options and futures products are awaiting regulatory approval and are expected to launch in the coming weeks.

CBOE also confirmed last week that it will launch contracts linked to its Russell 2000 Volatility Index that provides access to the volatility of small cap stocks. Futures will launch on the CFE platform on October 30, while options will follow shortly after.

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