Cboe Global Markets is set to launch the 1-day Volatility Index, or VIX1D, to measure expected volatility in the S&P 500 over the next day of trading, unlike the main VIX which measures it over the following month.
This marks the biggest shakeup in years for the VIX, with the newest version tracking expectations of short-term market swings.
The new, non-tradable 1-day volatility index is designed to provide real-time information about the expected volatility of the current trading day. It accounts for the compressed measurement of expected volatility over a single day and differs from the VIX Index in ways to account for this.
By its nature, the VIX1D Index is expected to generally behave in a more volatile manner than indices that measure a longer time horizon of expected volatility.
This is because news events that affect the S&P 500 Index on a given day are expected to have a bigger impact in short-dated SPX options than in longer dated options when market participants have more time to react to the news event.
For example, amid the recent collapse of two U.S. banks between March 8, 2023, and March 13, 2023, the VIX Index rose almost 39% from 19.11 to 26.52 while the backtested VIX1D Index soared 162.7% from 15.30 to 40.19 over this period.
On days of heightened volatility, the VIX1D Index is expected to reflect short-term impacts, whereas by its design, the VIX Index is expected to continue to reflect expected volatility 30 days out.
One reason the VIX has been losing its edge, is that traders who are hedging against — or betting on — turmoil are piling into options with zero-days-to-expiration, or 0DTE.
Since the VIX is calculated using derivatives that expire 23 to 37 days into the future, the view is that it has been struggling to capture this near-term sentiment, which largely emerged last year when the introduction of new expiration days drove the boom.
Zero-day options have spiked in popularity since May, when Cboe expanded existing short-term derivatives to include Tuesday and Thursday expirations, which filled out the week.
By the third quarter of last year, 0DTE contracts accounted for more than 40% of the S&P 500’s total options volume, almost doubling the percentage from six months earlier, according to data compiled by Goldman Sachs.
“For decades, market participants looking to understand, measure and manage volatility have turned to Cboe, ” said said Ed Tilly, chairman and CEO of Cboe Global Markets.
He added, “We are committed to continuing to innovate in the volatility space and we believe the VIX1D Index will be a complementary addition for market participants seeking to better understand current equity market volatility or as they employ different trading strategies.
The development of the VIX1D Index is another example of the strength of Cboe and S&P Dow Jones Indices’ long-standing relationship, highlighting the companies’ shared commitment to drive innovation through rigorous data analysis and market solutions.”
Rob Hocking, senior vice president and head of product innovation at Cboe, said, “We believe the VIX1D Index will be a useful tool for the growing group of investors utilizing same-day options trading strategies to better understand the daily market dynamics.”
The VIX1D Index was launched 30 years after the original Cboe Volatility Index or VIX Indexh made in=ts debut in April 1993.
It has grown into a VIX Index suite that includes the 30-day VIX Index, VIX 1-year, VIX 6-month, VIX 3-month, and VIX 9-day Indices.
©Markets Media Europe 2023
