CBOE’s 1-day Volatility Index

Yesterday was the launch of the CBOE’s 1-day Volatility Index, also known as VIX1D. The original VIX, which launched 30 years ago, measures expected volatility in the S&P 500 over the coming month, but the VIX1D will track expectations of short-term market swings. This move comes in response to a recent transformation in derivatives markets that had sparked concerns about the effectiveness and relevance of the original VIX.

Short-term options trading, which has less of a weighting in the calculation of the main VIX, has almost quadrupled since the start of 2020. The VIX1D is expected to address the demand for more accurate measurements of short-term market swings. The launch of the new index is expected to have a significant impact on option traders in the S&P 500 market. The VIX1D will allow traders to track short-term market swings more effectively, which will be beneficial for those who use short-term options contracts to take targeted positions around events such as economic data releases or monetary policy meetings.

Traders who have been relying on the original VIX to hedge against stock declines may need to adjust their strategies, as the VIX1D’s short-term focus is expected to make it much more volatile than the 30-day original. This may require traders to recalibrate their risk management strategies and may result in higher trading volumes.

However, the exchange currently has no plans to offer contracts tied directly to the one-day index, which may limit the immediate impact on traders. The exchange has said that settling trades linked to the shorter-term index would raise practical challenges, but added that if there is demand, they will explore ways to effectively give the market more ways to trade.

Overall, the launch of the VIX1D is expected to provide option traders with more tools to manage risk in the S&P 500 market and may result in increased trading volumes as traders adjust their strategies to take advantage of the new index. Furthermore, this is a testament to growing interest and demand for options in equity markets which we absolutely love to see.