October 23 — Earlier this month there was quite a bit of worldwide apprehension over the wrangling in Washington D.C. regarding the partial government shutdown and possible U.S. debt default. Contentious governmental negotiations could resume in January 2014.
How have investors’ expectations about near-term and medium-term volatility changed over the past couple of weeks? The CBOE Short-term Volatility Index (VXST(SM)) provides a new market-based gauge of expectations of 9-day volatility. On October 15 the VXST Index closed at 23.54 – its highest closing value so far this year. However, today the VXST Index closed at a much lower 12.37 (down 47% since October 15), its lowest closing value in more than a month. As shown in the first chart below, today’s closing values were 13.42 for the CBOE Volatility Index® (VIX®) (a measure of expectations of 30-day volatility) and 15.11 for the VXV Index (a measure of expectations for 3-month volatility).
TERM STRUCTURE CHARTS
In addition to the VXST, VIX and VXV indexes above and at www.cboe.com/volatility, another valuable tool for gauging expectations of S&P 500® (SPX) volatility over different time frames is shown at the SPX Volatility Term Structure page at www.cboe.com/VIXTerm. The term structure refers to the characteristic differences in the volatility calculated for options of different maturities. The concept of term structure is essential in the pricing and trading of VIX futures and options, offering insight into expectations of market volatility in forward contract months conveyed by S&P 500 (SPX) index options prices.
Below are two Term Structure charts generated from that page for the dates of October 15 and October 22. In the first chart below for October 15 (the date that the VXST hit its yearly high), note that for the first two expirations there is a downward slope – expected volatility was 18.64 for the November 16 expiration date, and 18.27 for the December 21 expiration date. However, for most expirations on both charts below, term structure is upward-sloping, meaning that the market generally expects more volatility in future months, or at least has more uncertainty about future months. Looking farther out on the charts below, the market-based expectations for SPX volatility at the June 19, 2015 expiration date were 21.36 on October 15, and 20.26 on October 22.