On October 1 the new CBOE S&P 500 Short-Term Volatility Index (VXST) was introduced at the second annual CBOE Risk Management Conference Europe. VXST is first-ever volatility gauge that includes the expected volatility of the popular SPX Weeklys options.
To gain an understanding of investors’ consensus views of expected stock market volatility over different time frames, the new VXST Index can be compared to the popular VIX and VXV indexes.
As shown in the table below, for the period from Jan. 2011 through Aug. 2013, the VXST had higher historic volatility, higher maximum daily close, and the bigger one-day up- and down moves than the VIX and VXV indexes.
On Friday, August 5, 2011, credit rating agency Standard & Poor’s (S&P) downgraded its credit rating of the U.S. federal government from AAA (outstanding) to AA+ (excellent), and the financial markets encountered much near-term uncertainty. On Monday, August 8, 2011, the VXST Index rose 80.9% to close at 68.00, the VIX rose 50% to close at 48.00, and the VXV rose 28.8% to close at 38.10. It is interesting to compare the index values to the term structure charts below.
Below is a chart of the VIX term structure that was calculated at the term structure link at www.cboe.com/VIX. The term structure on August 8, 2011 was at 65.16 for the August 20 expiration date and was downward sloping, indicating that there was quite of bit of near term uncertainty on that date. The VIX term structure illustrates, by maturity, expectations of market volatility conveyed by S&P 500 (SPX) stock index option prices. CBOE calculates these expectations by applying the VIX methodology to standard SPX option maturities. Market analysts and traders can use VIX term structure data to see how market expectations on volatility compare to their own expectations. The VIX term structure is also useful for investors looking to trade products based on forward volatility, such as VIX futures, VIX options, and VIX-related exchange-traded products.
On Friday, October 4, 2013, the closing values were 16.62 for VXST, 16.74 for VIX, and 17.21 for the VXV Index.
As shown in the chart below, the term structure was upward sloping on October 4, 2013, with a 16.78 value for the Nov. 16 expiration date. Despite some nervousness about the negotiations of the U.S. government regarding the partial shutdown and debt limit, the chart below indicates that the market appears to have more uncertainty about longer-term volatility.
Investors can use the historical and current data from the VXST, VIX and VXV indexes, and from the term structure data, to gain a better understanding of the market’s expectations of future volatility. The new VXST Index is particularly responsive to changes in short-term volatility triggered by market events, such as earnings, government reports and Fed announcements.