VIX

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The Cboe Volatility Index (VIX Index) measures the market’s expectation of future volatility implied by S&P 500 stock index (SPX) options prices.[1] In other words, VIX Index uses options pricing as a way to measure perceived market risk and uncertainty. The VIX Index is a 30-day risk forecast of stock market volatility and typically has an inverse relationship with the S&P benchmark as it tracks option prices that investors are willing to pay as a protection on the underlying stocks.[2]

Introduced in 1993, the VIX index is an important barometer of investor sentiment and market volatility. The Cboe VIX futures contract was launched in 2004 and VIX options on futures were launched in 2006.[3][4][5][6] It is often referred to as the "investor fear gauge."[7]

VIX Futures

Futures on the Cboe's VIX Index were introduced on the CBOE Futures Exchange (CFE) on March 26, 2004, and are the most actively traded futures contract on the exchange. The contract multiplier is $1,000 on the futures.[8]

Volume growth in the VIX has been dramatic. Average daily volume in VIX futures rose to 294,259 contracts in 2017, up from 238,773 in 2016, 204,996 in 2015, 200,552 in 2014, 158,580 in 2013 and 95,212 in 2012, 47,777 in 2011, 17,469 in 2010, 4,580 in 2009, 4,301 in 2008, 4,169 in 2007 and 1,731 in 2006.

On June 24 2014, the CBOE extended VIX futures trading hours to nearly 24 hours a day, five days a week.[9] [10]

VIX Options

In February 2006, VIX options began trading on the Chicago Board Options Exchange, the first options product on market volatility to be listed on a Securities and Exchange Commission-regulated securities exchange.

Volume growth in VIX options has also been dramatic. In 2017, VIX options average daily volume was 722,356 in 2017, 588,279 in 2016, 573,176 in 2015, 632,419 in 2014, 567,460 in 2013 and 442,959 in 2012, 388,485 in 2011, 247,826 in 2010, 132,255 in 2009, 102,754 in 2008, 93,181 in 2007 and 23,491 in 2006.[11]

In 2015 the CBOE expanded trading hours for both the VIX options and S&P 500 Index (SPX) options, adding more than six hours of additional trading five days a week.[12]

VIX Weekly Options began trading on October 8, 2015, in the same options chain as the standard-expiration VIX options.[13]

Other VIX-based Products

In addition to the VIX futures and options at Cboe, the exchange has listed additional volatility contracts including: Cboe Russell 2000 Volatility Index futures, S&P 500 Variance futures and Cboe/CBOT 10-Year U.S. Treasury Note Volatility Index.

Cboe, though its partnership with Standard & Poor's has also licensed out the VIX methodology to other exchanges such as: CME Group, Euronext, Taiwan Futures Exchange, National Stock Exchange of India, TMX Group, Japan Exchange Group and the Australian Stock Exchange. It also licensed its methodology to the Hang Seng Indexes Company for the HSI Volatility Index. [14] [15][16][17]

Background

In an article entitled "Fear and Greed in Global Asset Allocation," in the spring 2000 issue of The Journal of Investing, the VIX Index was characterized as "a good indicator of the level of fear or greed in U.S. and global capital markets." When investors are fearful, the article noted, the VIX level is "significantly higher than normal."[18]

A research report by CBOE, entitled "VIX: Fact and Fiction, released in 2009, explained some of the most common myths surrounding the VIX, many of which had arisen during the fall and winter of 2008 during which the VIX Index level rose to record highs.[19]

The original VIX Index, developed by Professor Robert E. Whaley and introduced by CBOE in 1993, was constructed using the implied volatilities of eight different OEX option series so that, at any given time, it represented the implied volatility of a hypothetical at-the-money OEX option with exactly 30 days to expiration. In 2003, this construction changed. It still measures the market's expectation of 30-day volatility, but in a way that conforms to more recent thinking and research among industry practitioners. The "new" VIX, then:

  • Is based on S&P 500 index option prices and "incorporates information from the volatility 'skew' by using a wider range of strike prices rather than just at-the-money series." (The original VIX used only at-the-money options.)
  • Uses a newly developed formula to derive expected volatility directly from the prices of a weighted strip of options. (The original VIX extracted implied volatility from an option-pricing model.)
  • Uses options on the S&P 500 Index, which is the primary U.S. stock market benchmark. (The original VIX was based on S&P 100 Index - OEX - options prices.)[20][21]

VIX Exchange Traded Products

Since the launch of VIX futures and options, many so-called exchange traded products like exchange traded funds or ETFs were listed on publicly traded exchanges, as well as products offered by sell-side institutions to customers looking for volatility protection or speculative exposure.

In early 2018, 21 ETFs were traded with assets under management of $6.31 billion, according to ETF.com.[22]

February 2018 Market Drop, VIX In The Middle

On February 5, 2018, the US stock market plunged with the Dow Jones Industrial Average falling more than 1,500 points at one stage, the worst intra-day drop in market history. The Dow swung wildly on February 6, falling 567 points but finishing up 567 points. While causes for the massive drop varied from concerns about the US Federal Reserve bank moves on interest rates to algorithmic trading, many market participants focused on the VIX, which rose 177 percent on February 5, and on VIX-based exchange traded products.[23][24]

The move in the VIX was so severe that Credit Suisse announced the collapse of its so-called VelocityShares Daily Inverse VIX Short-Term Exchange-Traded Note (ETN), the second largest publicly traded exchange traded product which bet on low volatility. Another prominent inverse ETF also dropped, ProShares’ VIX Short VIX Short-Term Futures exchange traded fund (ETF). At the time, Bloomberg estimated that $8 billion of products were tied to the VIX. These products were being blamed in part for the market sell-off and wild ride.

Some said the exchange traded funds tied to the VIX exacerbated the swings in the VIX itself and the broader market. Cboe defended the index, saying it performed as it should during a stressful period. It also pointed out that other exchange traded products held other positions in the market that took advantage of the volatility and performed well on Cboe.[25][26][27]

Awards

In 2004, VIX Index Futures won the Most Innovative Index Product Award at the Ninth Annual Super Bowl of Indexing Conference.

In 2006, Options on the VIX Index won the Most Innovative Index Product at the presentation of the William F. Sharpe Indexing Achievement Awards at the Eleventh Annual Super Bowl of Indexing Conference.

VIX Prices

A spreadsheet with historical and current price history data is available at CBOE Historical Data

Resources

References

  1. CBOE Volatility Index (VIX) Options Q&A. Chicago Board Options Exchange.
  2. Caution prevails, but volatility seen lower. Reuters.
  3. Cboe Volatility Index® (VIX®). Cboe.
  4. "Can the VIX Signal Market Direction?". Credit Suisse.
  5. "VIX as a Companion for Hedge Fund Portfolios". The Journal of Alternative Investments.
  6. VIX Futures and Options Pricing and Using Volatility Products to Manage Downside Risk and Improve Efficiency in Equity Portfolios. Journal of Trading.
  7. 30-Second Guide To Volatility Index (VIX). This Is Money.
  8. Contract Specifications Cboe Volatility Index® (VX) Futures. CBOE.
  9. VIX Futures at 2 A.M., Finally. Bloomberg.
  10. CBOE CEO Edward Tilly At 30th Annual CBOE Risk Management Conference: Announces Plans For June 22 Launch of 24-Hour VIX Futures Trading. CBOE.
  11. VIX Quick Reference Guide - (English). CBOE.
  12. CBOE Set to Expand VIX and SPX Options Trading Hours in Early March. CBOE.
  13. VIX Weeklys Options Launched – In VIX Options Chain; More Precision and Responsiveness. CBOE.
  14. Volatility Benchmarks in Europe. CBOE Press Release.
  15. Hang Seng Indexes to Use CBOE VIX Methodology and S&P Calculation for HSI Volatility Index. S&P.
  16. CBOE GRANTS LICENSE FOR VOLATILITY INDEXES TO CME GROUP. CBOE Press Release.
  17. S&P/JPX JGB VIX Methodology. S&P.
  18. "Fear and Greed in Global Asset Allocation". The Journal of Investing.
  19. VIX: Fact and Fiction, May 1, 2009. Chicago Board Options Exchange.
  20. Faculty Profile, Robert E. Whaley. Vanderbilt Owen Graduate School of Management.
  21. White Paper, CBOE Volatility Index. Chicago Board Options Exchange.
  22. Volatility ETF Overview. ETF.com.
  23. What’s next for the very volatile stock market. Quartz.
  24. Cboe says Vix products not to blame for market rout. FT.
  25. The VIX Can’t Cause Vol – Cboe’s View on Volatility ETPs. John Lothian News.
  26. Inside Wall Street's $8 Billion VIX Time Bomb. Bloomberg.
  27. Credit Suisse 'volatility' fund liquidated after market selloff. Reuters.