CBOE’s Jay Caauwe Talks $VXST

Good day friends of CBOE, Jay Caauwe back with a special report. CBOE Futures Exchange has announced that it plans to launch trading of futures with weekly expirations on the new CBOE Short-Term Volatility Index on Thursday, February 13, pending regulatory review and with Spot Trading as the Designated Primary Market Maker

CBOE developed the CBOE Short-Term Volatility Index (“VXST Index” or “Short-Term VIX Index”) in response to proven demand for Weekly options in general, and volatility contracts that measure a shorter time period in particular.  Like the flagship CBOE Volatility Index, the Short-term VIX Index reflects investors’ consensus view of expected stock market volatility using CBOE’s proprietary VIX methodology.  Both indexes use S&P 500 Index options in their calculations.  The VIX Index uses SPX monthly options to measure expectations of 30-day volatility, while the VXST Index uses SPX options that expire every week, including of course, SPX Weeklys to gauge expectations of nine-day volatility.  The VXST Index’s shorter time horizon makes it particularly responsive to short-term volatility triggered by market events such as corporate earnings, government reports and Fed announcements.

The 30-day VIX Index and the nine-day VXST Index are highly correlated, but the VXST Index is generally more volatile than the VIX Index. As an example, when Standard & Poor’s downgraded U.S. debt in August 2011, VXST Index values rose 81 percent, while the VIX Index rose 50 percent thus enabling traders to pinpoint and hedge the volatility of event driven market moves. And to that one may consider unique spread opportunities via strategies using VXST and VIX to capture changes in the volatility term structure bearing in mind that Short-term VIX futures will have the same expiration day as VIX futures. Stay tuned to this space for more information on VXST futures.