(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 on the American market in the short term.
“The fear index”, such is the nickname of the Cboe Volatility Index (VIX), an index which must measure the level of volatility of the American market and more precisely of 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 Voltality Index, abbreviated (fortunately) 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, measuring volatility over thirty days. The traditional VIX is, in fact, calculated by taking as references financial options which expire between 23 and 37 days from the date of calculation, which prevents it from capturing the mood of the market in the very short term.
This was particularly visible during the great panic that shook the banking sector in the United States in March, where the VIX certainly rose but did not reach levels that had been observed on multiple occasions in 2022.
It is to rectify the situation that the VIX1D was launched, based, therefore, on 0DTE, that is to say “zero day to expire” options, which expire the same day. These derivative products have, as IG Markets points out, grown enormously in popularity since 2021.
“0DTE options have been used by retail traders as a low-cost way to trade the rise and fall in prices of ‘meme stocks’ (which are stocks supported by a community of traders on message boards such as Reddit) like 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 volumes traded with the underlying S&P 500 in the third quarter, according to data from Goldman Sachs cited by Bloomberg.
Much stronger variations
This boom therefore escaped the VIX whose construction was beginning to become somewhat obsolete. With the VIX1D, the Cboe hopes to provide a more meaningful reading to investors in the short term.
The company explains that between March 8 and March 13, a period marked by the bankruptcies of the banks Silicon Valley Bank and Signature Bank, the VIX1D would have increased by 163% over the period against an increase 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 the 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 the Cboe, becoming a “cash cow”, so “why not try to extract a little more milk?”.
Recall that beyond the VIX, CNN launched in 2012 the “Fear and Greed” index (“fear and greed”), supposed to measure market excesses in one direction or another, either when they are too fearful or, on the contrary, when the level of risk and enthusiasm reaches proportions deemed too high.
It should also be noted that all these indices measuring a form of market sentiment obviously do not replace fundamental and technical analyzes for making an investment decision.
Julien Marion – ©2023 BFM Bourse