(BFM Bourse) – The Chicago board options exchange launched a one-day version of the VIX in April, while the traditional index has not always been able to capture the rise in risk in the US market in the short term.
“The fear index”, that is the nickname of the Cboe Volatility Index (VIX), an index that measures the level of volatility on the American market and more precisely on the S&P 500.
Thirty years after its launch, the VIX has seen a little brother appear alongside it, launched by the Chicago Board Options Exchange (Cboe), a market operator specializing in derivatives, at the end of April.
Its name: Cboe 1-Day Volatility Index, abbreviated (thankfully) VIX1D. Like its big brother, this index calculates the volatility of the S&P 500 based on the prices of financial options, but with a shorter maturity, at most one day.
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Zero day to expire options
The purpose of this new index is quite simple: to try to better measure the volatility over one day (intraday) of the market, which the VIX could not achieve by measuring volatility over thirty days. The traditional VIX is actually calculated by taking financial options as a reference, which expire between 23 and 37 days from the date of calculation, which prevents it from capturing market sentiment in the very short term.
This was particularly visible during the major panic that rocked the US banking sector in March, where the VIX certainly rose but did not reach levels that had been observed on several occasions in 2022.
It is to correct the situation that VIX1D was launched, therefore based on 0DTE, i.e. “zero day to expire” options which expire on the same day. These derivatives, as IG Markets points out, have grown tremendously in popularity since 2021.
“0DTE options have been used by retailers as a cheap way to trade the rise and fall in prices of ‘meme stocks’ (which are stocks backed by a community of traders on message boards like Reddit) such as GameStop Corp and Tesla Inc,” explains the market intermediary. “Institutional traders also jumped on the bandwagon in a big way this year,” IG Markets continues.
Their popularity is such that these “0DTE” options accounted for 40% of total options traded on the underlying S&P 500 in the third quarter, according to Goldman Sachs data cited by Bloomberg.
Much stronger variations
This boom therefore eluded the VIX, whose construction began to become somewhat obsolete. With the VIX1D, Cboe hopes to provide a more meaningful reading for investors in the near term.
The company explains that between March 8 and March 13, a period marked by the failures of Silicon Valley Bank and Signature Bank, the VIX1D would have increased by 163% during the period, compared to a rise of only 38.8% for the traditional VIX.
It remains to be seen whether investors will appreciate this new thermometer over time. “I’m not sure this will bring a new level of clarity to the markets, but I fully understand why Cboe is doing this. [cet indice, NDLR]”, told Bloomberg Steve Sosnick, chief strategist at Interactive Brokers. According to him, the VIX was a deserved success for Cboe, becoming a “cash cow”, so “why not try to extract a little more milk?”.
Recall that in addition to the VIX, in 2012 CNN launched the “Fear and Greed” index (“fear and greed”), which was supposed to measure market excesses in one direction or another, either when they are too afraid or, on the contrary, when risk level and enthusiasm when proportions that are considered too high.
It should also be noted that all these indices, which measure some form of market sentiment, obviously do not replace fundamental and technical analysis to make an investment decision.
Julien Marion – ©2023 BFM Bourse