Today CBOE is beginning its calculations of the spot value of the CBOE Volatility Index® (VIX®) using S&P 500® Index (SPX) options with weekly and standard 3rd Friday expirations that more closely bracket the 30-day target timeframe. While this change is not expected to have a dramatic impact on the spot VIX Index, the change is a more precise enhancement to the VIX as the premier 30-day measure of the expected volatility of the S&P 500 Index.
Please visit the previous (Part 1) Blog on October 3 for an initial discussion of this change.
Below is even more information on the change and on the VIX Index.
- PAST HISTORY OF VIX INDEX IS UNCHANGED
The past data history of the VIX Index dating back to 1990 is not changed.
- COMPARING THE NEW VIX INDEX AND THE LEGACY VIXMO INDEX TODAY
Beginning today, the legacy spot VIX Index values are being published under the new name CBOE S&P 500 Standard Monthly Only Volatility Index (ticker VIXMO). Here is a chart comparing the VIXMO (legacy) and new VIX indexes today (October 6th) through 12:47 p.m. Chicago time. Throughout much of the day, the indexes were within 2/10th of a volatility point from each other.
3. TERM STRUCTURE
Implied volatilities can vary depending on the expiration dates of options, and the concept of term structure can be very helpful in understanding the calculation of the VIX and the pricing of options in general. CBOE provides an updated term structure chart and table at www.cboe.com/vixterm. At that page on Oct. 6th at 12:08 p.m. Chicago time, the estimated SPX implied volatilities were – 15.65 for the Oct. 18 expiration date, 15.58 for Nov. 22, 16.24 for Dec. 20, and 16.65 for Jan. 15 expiration date. For most of this year the term structure has been upward sloping.
- COMPARISONS TO SPX HISTORIC VOLATILITY AND TO VIX FUTURES PRICES
Some investors have inquired about the recent levels of VIX in relation to the long-term average of VIX (around 20) and to VIX futures prices. While some ask if VIX is low in light of worldwide geopolitical tensions, it is worth noting that the VIX Index usually has been higher than SPX historic volatility in recent months (and arguably the VIX Index is not “low” when compared to SPX historic volatility; see chart below). I also note that the CBOE SKEW Index recently hit a 15-year high, showing that there is demand for protection with out-of-the-money SPX puts. The second chart below shows that in recent months the VIX Index usually has been in contango; the VIX futures often have been higher priced than the spot VIX Index.
- VOLUME GROWTH FOR S&P 500 WEEKLY OPTIONS
A contributing factor that facilitated the October 6 change is the growth in volume for S&P 500 Weekly options (SPXW), which expire on any Friday of the month other than the third Friday of the month, and are P.M.-settled series. Trading in expiring SPX Weeklys closes at 3:00 p.m. on their expiration date. Average daily volume for S&P 500 Weekly options rose from 65,254 in March 2012 to 272,825 in September 2014.
- NO IMPACT ON VIX FUTURES AND OPTIONS
The addition of SPX Weeklys options to the VIX Index calculation will not impact the VIX futures and options contracts. The final settlement value for VIX futures and options will continue to use the same VIX Index formula and the opening prices of standard (i.e., third-Friday expiration) SPX option series with 30 days to expiration. The volume growth in the VIX options and futures is impacted by the growth in interest in use of the VIX-related tools for portfolio management.
- MORE INFORMATION
For more information on the VIX Index and the October 6 change (including links to Circulars, VIX White Paper (with detailed methodology), Press Release, strategies, spreadsheets, bibliography, and charts), please visit www.cboe.com/VIX.