VIX

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The Cboe Volatility Index (VIX Index)[1] measures the market’s expectation of future volatility implied by S&P 500 stock index (SPX) options prices. 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]

Since its introduction in 1993, the VIX Index has been considered by many to be an important barometer of investor sentiment and market volatility.[3][4][5] It is often referred to as the "investor fear gauge." Dividing the value of the S&P 500 by the VIX Index ratio is said to give the confidence level in relation to the market. The higher the ratio, the higher the confidence.[6]

VIX Futures

Futures on the Cboe's VIX Index were introduced on the CBOE Futures Exchange (CFE) in 2004, and are the most actively traded futures contract on the exchange. The year 2013 marked the busiest year since VIX futures began trading. Trading volume in VIX futures totaled 39.9 million contracts for the year, a fourth straight annual volume record -- surpassing the 23.8 million contracts traded in 2012 by 68 percent. Average daily volume in VIX futures was 158,508 contracts, also a fourth consecutive annual record, and up 67 percent from 2012. [7]

On June 24 2014, the CBOE extended VIX futures trading hours to nearly 24 hours a day, five days a week. The market for VIX futures began operating from 6 p.m. Sunday to 4:15 p.m. Friday New York time. On weekdays, became continuous except for 15 minutes after 4:15 p.m. Before the change, the market was open from 3 a.m. to 4:15 p.m. New York time on weekdays, with an additional session from 4:30 p.m. to 5:15 p.m. Monday through Thursday.[8] [9]

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. In 2013, VIX options totaled 143 million contracts, with average daily voluem of 567,460 contracts, up 29% from 2012.

In February 2015 the CBOE said it would expand 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. The extended hours for VIX options begin Monday, March 2. They will run Monday through Friday, beginning each day at 2:00 a.m. CT and ending at 8:15 a.m. CT. The 2:00 a.m. CT start in Chicago syncs with the 8:00 a.m. open of trading in London.[10]

VIX Weekly Options began trading on October 8, 2015, in the same options chain as the standard-expiration VIX options.[11]

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."[12]

A research report by CBOE, entitled "VIX: Fact and Fiction [13], 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.

The original VIX Index, developed by Professor Robert E. Whaley[14] 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.[15]; 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.)

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

  • Cboe VIX Press Releases [1]
  • "“VIX Futures and Options – A Case Study of Portfolio Diversification During the 2008 Financial Crisis,” University of Massachusetts at Amherst, May 2009: Full Report [2]; Two-page Summary[3]; Press Release [4]
  • "VIX: Fact and Fiction," [5], Chicago Board Options Exchange, May 1, 2009
  • The Cboe Futures Exchange offers a monthly newsletter Futures in Volatility that provides a VIX market summary and analysis by options expert Larry McMillan. Futures In Volatility
  • Antognelli, Ferreira, McArdle, and Traub. "Fear and Greed in Global Asset Allocation." The Journal of Investing. (Spring 2000), pp. 27—32.
  • Arvedlund, Erin. "Calm Before the Storm? Low Volatility Often Precedes Market Downturn." Barron's Jan. 28, 2002.
  • Black, Keith H. "Improving Hedge Fund Risk Exposures by Hedging Equity Market Volatility, or How the VIX Ate My Kurtosis." The Journal of Trading. (Spring 2006).
  • Connors, Larry. "Timing Your S&P Trades with the VIX." Futures (Jun 2002): pp. 46—47.
  • Copeland, Maggie. "Market Timing: Style and Size Rotation Using the VIX." Financial Analysts Journal, (Mar/Apr 1999); pp. 73—82.
  • Daigler, Robert T., and Laura Rossi. "A Portfolio of Stocks and Volatility." The Journal of Investing. (Summer 2006).
  • Derman, E., M. Kama, I. Kani, and J.Zou, 1996, "Valuing Contracts with Payoffs Based on Realized Volatility," Global Derivatives Quarterly Review, Equity Derivatives Research, Goldman, Sachs & Co.
  • Lauricella, Tom and Aaron Lucchetti. "What's Behind the Surge In the VIX 'Fear' Index?" Wall Street Journal (Oct 23, 2008) pg. C1.
  • Lin, Yueh-Neng. "Pricing VIX Futures: Evidence From Integrated Physical And Risk-Neutral Probability Measures." Journal of Futures Markets (2007), vol. 27, no. 12, pp. 1175-1217.
  • Moran, Matthew T. and Srikant Dash. "VIX Futures and Options: Pricing and Using Volatility Products to Manage Downside Risk and Improve Efficiency in Equity Portfolios." The Journal of Trading. (Summer 2007).
  • Sepp, Artur. VIX Option Pricing in a Jump-Diffusion Model Risk Magazine, pp. 84-89, April 2008.
  • Sulima, Cheryl. "Volatility and Variance Swaps" Capital Market News, Federal Reserve Bank of Chicago. (March 2001).
  • Szado, Edward. “VIX Futures and Options: A Case Study of Portfolio Diversification During the 2008 Financial Crisis.” (Fall 2009) pp. 68 – 85.
  • Tan, Kopin. "The ABCs of VIX." Barron's (Mar 15, 2004): p. MW16.
  • Tracy, Tennille. "Index of Volatility Reflects Traders' Continued Caution." Wall Street Journal. (Oct 15, 2008) pg. C6.
  • Tracy, Tennille. "Trading Soars on Financials As Volatility Index Hits Record." Wall Street Journal. (Sep 30, 2008) pg. C6.
  • Whaley, Robert E., 1993, "Derivatives on Market Volatility: Hedging Tools Long Overdue," Journal of Derivatives 1 (Fall 1993), pp. 71—84.
  • Whaley, Robert E. "Understanding the VIX." The Journal of Portfolio Management (Spring 2009).

References

  1. CBOE Volatility Index (VIX) Options Q&A. Chicago Board Options Exchange.
  2. Caution prevails, but volatility seen lower. Reuters.
  3. "Can the VIX Signal Market Direction?". Credit Suisse.
  4. "VIX as a Companion for Hedge Fund Portfolios". The Journal of Alternative Investments.
  5. VIX Futures and Options Pricing and Using Volatility Products to Manage Downside Risk and Improve Efficiency in Equity Portfolios. Journal of Trading.
  6. 30-Second Guide To Volatility Index (VIX). This Is Money.
  7. 2013 Trading Volume Reaches New All-Time High At CBOE Futures Exchange. CBOE.
  8. VIX Futures at 2 A.M., Finally. Bloomberg.
  9. CBOE CEO Edward Tilly At 30th Annual CBOE Risk Management Conference: Announces Plans For June 22 Launch of 24-Hour VIX Futures Trading. CBOE.
  10. CBOE Set to Expand VIX and SPX Options Trading Hours in Early March. CBOE.
  11. VIX Weeklys Options Launched – In VIX Options Chain; More Precision and Responsiveness. CBOE.
  12. "Fear and Greed in Global Asset Allocation". The Journal of Investing.
  13. VIX: Fact and Fiction, May 1, 2009. Chicago Board Options Exchange.
  14. Faculty Profile, Robert E. Whaley. Vanderbilt Owen Graduate School of Management.
  15. White Paper, CBOE Volatility Index. Chicago Board Options Exchange.