One reason I am sad I couldn’t got to the CBOE Risk Mgmt Conference is because I missed some amazing announcements and panels. In particular, I think the real headline announcement was the announcement of the short term VIX index or VXST. VXST is going use similar calculations to the VIX but will have 9 day duration. I am not going to get into the major details because Russell did such a good job with it. http://bit.ly/19Tjcm9
One the major questions I have been getting about the index is ‘why would someone use this, instead of VIX?’ I liken VXST and VIX to the difference between gamma and Vega. Vega is a portfolios measure to the change in insurance prices, effectively implied volatility. Gamma is a portfolios exposure to actual market movement, or realized volatility.
VIX, , will continue to be the markets best bet of how expensive it is to buy insurance premiums in the SPX and its futures and options will be the best method to hedge of 1 year variance swaps. Basically, VIX will tell us how badly the market wants insurance against possible market volatitly and future volatitly.
VXST will be the best measure of how much protection traders want for the here and now. Traders using VXST will be using this to measure how badly traders are racing to hedge their price risk.
Additionally, VXST will be the best alternative to the weeklies for event risk. I imagine VXST being great for playing Budget and Debt ceiling negotiations, major economic events, even wars. I could even imagine using VXST to isolate the gamma of a weekly option in the long term.
Using an insurance analogy one more time, VIX will measure how much auto insurance costs. VXST will measure how much it costs to pay the mechanic. Much like weekly options and standard options I think the two products will be additive to each other. It will also likely create all sorts of spreading opportunities.