The Need For Speed: How Cboe's New Volatility Index is Built to Track Next-Day Expectations

Cboe's New Volatility Index Built to Track Next-Day Expectations

The original Cboe Volatility Index just marked its 30th anniversary. The VIX, as it's commonly known, was launched in April 1993 as a way to measure expected volatility of the S&P 500. How? By distilling the prices of thousands of different options contracts into a single number. Rightly or wrongly, the VIX and its easy quote became Wall Street's "fear gauge." It provided- and still provides – a good look forward at investor expectations for 30 days' worth of market volatility.

But for options traders going Mach 2 with their hair on fire, a month is not good enough.

"You don't have time to think up there."

Into the fray, then, comes the VIX1D, the Cboe's new 1-Day Volatility Index. Launched on April 24, the latest innovation from the world's largest options exchange was built to measure the expected volatility of the S&P 500 over the next day of trading — a single number, in other words, representing what's directly in front of you.

More than a marketing gimmick (Cboe publishes a nine-day, six-month, and one-year VIX that don't do much), the VIX1D is a response to a surge in the use of extremely short-dated options. Strategies employing so-called zero-day options -- contracts that expire on the same day they are purchased -- have surged in popularity since the start of the covid pandemic. A Bank of America report indicates that about 45% of S&P 500 options volume on a typical day now comes from single-day options.

This transformation naturally sparked concerns about the effectiveness and relevance of the original VIX. Zero-day contracts allow options traders to take targeted positions around hot news events that affect the S&P 500 Index on any given day. This kind of intelligence cannot be captured in the calculation of the 30-day VIX.

"You Can Be My Wingman"

The VIX of 1993 was designed to provide market watchers, traders, and investors a real-time look at market sentiment regarding the variance of potential returns in a month. For its calculation, the original VIX combines a mash-up of real-time, mid-quote prices of S&P 500 options expiring between 23 and 37 days from the current trading day to calculate 30-day expected volatility.

VIX1D, on the other hand, uses essentially the same Cboe methodology to estimate expected volatility over the next day of trading by aggregating the weighted prices of a range of settled S&P options with one- to zero-day expirations. By design, the one-day index reflects short-term market impacts not available in the 30-day calculation. For example, the Cboe reports that amid the recent collapse of two U.S. banks between March 8, 2023, and March 13, 2023, VIX rose 38.8%, while the back-tested VIX1D would have risen 162.7% over the same period.

"It's Time to Buzz the Tower"

The VIX1D index itself is not a tradable instrument, at least not yet. You might remember that VIX futures didn't debut until 2004, with VIX options following in 2006. But there's nothing in the Cboe plan for VIX1D yet, in no small part due to the challenges of settling trades linked to a one-day index. But options professionals suggest that investor enthusiasm for short-term options will drive the marketplace.

The timing of the Cboe's launch of a one-day index is a pretty good indication that the exchange believes demand for zero-day strategies will continue long term. It’s likely Cboe and other providers will figure out ways to deliver products to meet that demand.

VIX1D Index data is available on Bloomberg and other data vendors under the ticker VIX1D.

Nick Greibenow

Nick Griebenow, CFA, is a Portfolio Manager for Shelton Capital Management’s Option Overlay Strategies. Mr. Griebenow has extensive knowledge in option strategies and was previously a Senior Derivatives Trader at a large national brokerage firm. He received a B.A. from Colorado State University.

Important Information

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