Most-watched gauge of market volatility hasn’t done much lately
About a month ago, as Wall Street stared down the barrel of an incipient banking crisis, the investment world’s most-watched gauge of market volatility did a funny thing: It didn’t do much.
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Sure, the CBOE Volatility Index — a measure of expected swings in the S&P 500 Index also known as the VIX — climbed. But even at its intraday peak, it didn’t come close to levels seen multiple times just a year ago.
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Many theories abound for why this once-reliable indicator of sentiment — famously known as Wall Street’s fear gauge — seems to be losing its edge. But one in particular keeps coming up: traders hedging against — or betting on — turmoil are piling into options with zero-days-to-expiration (0DTE).
Since the VIX is calculated using derivatives that expire 23 to 37 days into the future, the thinking is that it has been struggling to capture this near-term sentiment, which largely emerged last year when the introduction of new expiration days fomented the boom.
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Put simply: In the age of 0DTE, Wall Street may need a new fear gauge.
Enter the one-day VIX.
CBOE Global Markets Inc., the Chicago-based exchange operator behind the VIX, has announced that a new one-day version of its flagship volatility index is poised to launch. The CBOE 1-Day Volatility Index is scheduled to start on April 24, according to a notice on the company’s website.
If it succeeds in capturing the sentiment embedded in 0DTE options, it could mark a significant moment for investors and traders across the spectrum.
“This makes sense because so much of the volume has moved to shorter tenors,” Amy Wu Silverman, head of derivatives strategy at RBC Capital Markets, said. “I’ve been joking that the VIX is going through a mid-life crisis, being replaced by someone younger (shorter dates).”
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There is already some evidence that nearer-term options have been flashing more stress than the VIX. CBOE offers a nine-day version of the gauge (VIX9D), which has regularly traded at higher levels than the VIX this year.
Zero-day options have spiked in popularity since May, when CBOE expanded existing short-term derivatives to include Tuesday and Thursday expirations, blanketing each weekday.
By the third quarter of last year, 0DTE contracts accounted for more than 40 per cent of the S&P 500’s total options volume, almost doubling the percentage from six months earlier, according to data compiled by Goldman Sachs Group Inc.
CBOE is benefiting from the trading boom. 0DTE options are likely contributing to about 15 per cent of the exchange’s revenue, according to an estimate from Bloomberg Intelligence analysts including Paul Gulberg and Jackson Gutenplan.
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“I’m not sure that it will bring a new level of clarity to the markets, but I fully understand why the CBOE is doing it,” Steve Sosnick, the chief strategist at Interactive Brokers, said. “The VIX complex is a well-deserved cash cow for them, so why not try to extract a little more milk while they can.”
CBOE didn’t respond to a request for comment.
Concerns over the VIX’s effectiveness as a sentiment barometer have been growing for months. Its highest close in 2022 was in March, even though a selloff gripped the stock market for much of the remainder of the year.
The gauge is trading near the lowest in more than a year, despite softening economic data, looming fears over the United States debt ceiling and a mixed earnings season so far.
