Instability in equity volatility is driving client demand for related products, with Cboe Global Markets set to add another service to its suite less than two months after launching S&P 500 variance futures.
For traders, a key feature of US equity markets is its concentration – the degree to which the index return and volatility are driven by a few mega-cap stocks, and the degree to which other stocks are correlated with the biggest components in the index. This correlation – known as dispersion – can now be traded using a new index product.
The VIXEQ Index, developed in partnership with S&P Dow Jones Indices, measures the market cap weighted 30-day implied volatility of selected S&P 500 constituents, as determined by the Cboe S&P 500 Dispersion Basket Index (DSPBX). Launching on 4 November, it uses Cboe’s VIX Index methodology.
Cboe and S&P’s DSPBX Index provides the representative universe of large-cap US equities in relation to the DSPX Index calculation. The Cboe S&P 500 Dispersion Index (DSPX) was launched in September 2023 to provide insights into movement in the S&P 500 index relative to its companies over the next 30 calendar days.
Speaking to Global Trading, Rob Hocking, head of product innovation at Cboe, explained: “We calculate individual VIX values on each of the single name equities that make up the DSPBX basket. We market cap weight them, and then we subtract the VIX index itself.”
Client demand has driven the product’s development, Hocking shared; “This wasn’t something that we initially anticipated launching. Once we got the DSPX index out there, we had a bunch of inbounds that asked us to publish the VIX index for the constituents as well. We were already calculating it as part of the DSPX Index.”
Another recent addition to Cboe’s volatility product suite is Cboe S&P 500 variance futures, which gives users the ability to trade the spread between implied and realised volatility. This variance swap replication allows investors to manage two different risk characteristics, Hocking said, “capturing the balance between forward implied and what actually happened”.
“All of these products are somewhat interrelated in different ways, but each one gives investors a different risk metric to be able to trade or measure,” Hocking commented.
Further volatility services are in development at Cboe Labs, the company confirmed, including a futures product on the DSPX index.
©Markets Media Europe 2024
