CBOE Futures Exchange plans to launch trading of futures with weekly expirations on the new CBOE Short-Term Volatility Index (VXST) on 13 February, pending regulatory review.
Chicago Board Options Exchange developed the index in response to demand for Weeklys options generally, and volatility contracts that measure a shorter time period in particular.
Like CBOE’s flagship CBOE Volatility Index (VIX 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 (SPX) 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 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.
“We can’t help but be excited about launching Short-Term VIX futures, which combine the best features of our SPX Weeklys options and VIX futures. Traders will have at least four weekly expirations available at one time, providing tremendous flexibility to hedge around event-driven and unexpected market moves,” says CBOE chief executive officer Edward T Tilly. “We also expect professional traders to create strategies to take advantage of price differences between VIX and VXST products.”
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 US debt in August 2011, VXST Index values rose 81 per cent, while the VIX Index rose 50 per cent.
Spot Trading will be the designated primary market maker (DPM) for the Short-Term VIX futures traded at CFE.
In 2005, CBOE pioneered the Weeklys options product with SPX Weeklys. In 2013, SPX Weeklys accounted for approximately 24 per cent of all SPX options trading. Average daily volume for SPX Weeklys during 2013 reached an all-time high of 197,126 contracts, a 98 per cent increase from 2012.
