Cboe has launched VIX1D: A 1-day volatility index

Introducing the new 1-Day Volatility Index (VIX1D)

The Cboe Volatility Index (VIX) is used to measure investor sentiment about future market volatility. As a forward-looking indicator, it’s also known as the ‘fear gauge’. The higher the VIX goes, the greater the level of uncertainty is considered to be present. The number reflects the expected volatility of the S&P 500 index for the next 30 days.

Higher volatility tends to have a negative correlation with stock market performance and many investors like to use instruments related to VIX to hedge their portfolios. A stable future outlook is considered to be more favourable to help businesses realise their plans. While the index itself isn’t tradeable, investors are able to gain exposure to its movements through exchange-traded notes made up of Cboe listed futures and options. 

For example, the iPath Series B S&P 500 VIX Short-Term Futures ETN ($VXX) is generally considered as a "long" VIX option, as its returns are generally expected to increase when the VIX rises. 

On the other hand, the ProShares Short VIX Short-Term Futures ETF ($SVXY), is an inverse product designed to provide returns that are the opposite of the daily returns of the VIX as a “short” instrument.

However, many think that VIX has been losing its edge and point to the indicator’s muted reaction to the recent Silicon Valley Bank fall. Its issuer, Cboe, has noted increased interest in products with shorter-term lifespans.

In particular, zero-day options have become more popular over the last year. This led to the launch of the Cboe 1-Day Volatility Index (VIX1D) on 24 April 2023, 30 years after the original VIX index.

What does the new 'fear' index tell us?

The new one-day ‘fear’ index provides a measurement of the S&P 500 index’s volatility over the current trading day. The number is calculated based on the midpoint between bid and ask prices for zero-days-to-expiration (0DTE) options. This is a much more up-to-date figure compared to the VIX, which is based on financial instruments that expire 23 to 37 days into the future.

The VIX1D is expected to show a very rapid response to market events, in an almost real-time manner. They’re popular around dates of big announcements, such as the U.S. Federal Reserve’s meetings on interest rates. Its movements are likely to vary much more than the VIX due to its short-term nature.

There aren’t any futures, options or exchange-traded products linked to the VIX1D yet. It may be some time before it can prove its popularity amongst investors and whether it can build a reputation similar to VIX remains unclear at this early stage. With 0DTE contracts almost doubling as a proportion of S&P options volumes in 2022 to account for over 40% of the total by Q3, it could be unwise to ignore its future potential.

Megan Stals

Market Analyst

Megan is a markets analyst at Stake, with 7 years of experience in the world of investing and a Master’s degree in Business and Economics from The University of Sydney Business School. Megan has extensive knowledge of the UK markets, working as an analyst at ARCH Emerging Markets - a UK investment advisory platform focused on private equity. Previously she also worked as an analyst at Australian robo advisor Stockspot, where she researched ASX listed equities and helped construct the company's portfolios.