Next Thursday, just in time for Valentine’s Day and pending regulatory approval, the CBOE Futures Exchange will roll out trading on the CBOE Short-Term Volatility Index (VXST). VXST has created a lot of buzz ever since introduction back in October at the CBOE Risk Management conference in Portugal and I know of many volatility traders that are pretty fired up for VXST trading next week. For those that are still getting up to speed on VXST here are a five similarities and differences between the CBOE Short-Term Volatility Index and the CBOE Volatility Index.

**1. Measures of Expected Volatility –**

What’s the same –

Both VXST and VIX are standard measures that indicate a market expectation of volatility over a consistent time period and both are based on S&P 500 Index option prices.

What’s different –

VXST indicates the market’s expectation of volatility for the S&P 500 over nine days. VIX takes a longer term look and is an indication of expected market volatility over the next thirty days for the S&P 500.

**2. Calculation Methodology –**

What’s the same –

Both VXST and VIX use the same calculation methodology. Each is calculated through the combination of two S&P 500 Index (SPX) option series. The result is a consistent expected volatility measure. Both VXST and VIX are updated every 15 seconds during the trading day.

What’s different –

The difference between VXST and VIX is the expiring series of options that are used in the calculation. The VXST calculation uses the next two consecutive SPX option series that have at least one day remaining until expiration. These two expiration series are combined to calculate a nine day expected volatility outlook. VXST is the first volatility measure to use SPX Weeklys in the calculation. Depending on where the market is in the expiration calendar one or both of the series used for the VXST calculation may be SPX Weeklys.

The level of VIX is determined by combining the next two standard (third Friday) SPX option expiration series that have at least eight days remaining until expiration. The results of this calculation is a thirty-day implied volatility measure.

**3. Relationship with the S&P 500 –**

What’s the same –

Even casual market observers are aware of the historical inverse relationship between VIX and the S&P 500. VXST has a very similar relationship with the S&P 500. The correlation of daily price changes between VXST and the S&P 500 from 2011 to 2013 has been -0.7212. Over the same time period the correlation between VIX and the S&P 500 has been -0.8126.

What’s different –

The difference is the magnitude of price changes from VXST relative to VIX. VXST had tended to rally to higher highs and drop to lower lows. In January 2014 the S&P 500 lost about 3.5% and volatility markets were very active. During that month the closing low to high range for VXST was 9.97 to 20.84. The low to high range for VIX in January 2014 was 12.14 to 18.41.

**4. Underlying Contract Settlements –**

What’s the same –

Both the anticipated VXST and current VIX derivative contracts are AM settled, typically on a Wednesday. Also, both VXST and VIX will be settled based on open trades in SPX options, not based on the mid-point of the bid – ask spread.

What’s different –

Since VXST is a nine day volatility measure the contract settlement value will be calculated using options that expire nine days in the future. On a non-holiday week this would be the following week’s Friday. VIX is a thirty day measure and settlement is calculated using SPX option prices from the standard expiration series of the following month. That standard series is 30 days from the VIX settlement date.

**5. Historic Performance –**

What’s the same –

Both VXST and VIX have historically reacted to price changes in the equity market as indicated by the S&P 500. A dramatic drop in the S&P 500 has resulted in a quick move to the upside in both VXST and VIX.

What’s different –

The difference in the past has been the realized volatility of VXST and VIX. From 2011 to 2013 the 20 day realized volatility for VXST has been around 175% while the realized volatility for VIX was close to 109% over the same time period. Realized volatility is the amount of price movement that occurs over a time period – for VXST and VIX this means the average realized annualized price change over a 20 day period.

**Looking Forward –**

Next Thursday we will start to get an idea of how futures on VXST are going to price relative to the underlying index and then a bit later we should have options trading on VXST as well. The price behavior of VIX futures and options has been unique relative to other markets, I have a funny feeling VXST is going to have some trading similarities and differences as well. I am really looking forward to finding out just how VXST derivatives behave.

## Comparing VXST and VIX

Next Thursday, just in time for Valentine’s Day and pending regulatory approval, the CBOE Futures Exchange will roll out trading on the CBOE Short-Term Volatility Index (VXST). VXST has created a lot of buzz ever since introduction back in October at the CBOE Risk Management conference in Portugal and I know of many volatility traders that are pretty fired up for VXST trading next week. For those that are still getting up to speed on VXST here are a five similarities and differences between the CBOE Short-Term Volatility Index and the CBOE Volatility Index.

1. Measures of Expected Volatility –What’s the same –

Both VXST and VIX are standard measures that indicate a market expectation of volatility over a consistent time period and both are based on S&P 500 Index option prices.

What’s different –

VXST indicates the market’s expectation of volatility for the S&P 500 over nine days. VIX takes a longer term look and is an indication of expected market volatility over the next thirty days for the S&P 500.

2. Calculation Methodology –What’s the same –

Both VXST and VIX use the same calculation methodology. Each is calculated through the combination of two S&P 500 Index (SPX) option series. The result is a consistent expected volatility measure. Both VXST and VIX are updated every 15 seconds during the trading day.

What’s different –

The difference between VXST and VIX is the expiring series of options that are used in the calculation. The VXST calculation uses the next two consecutive SPX option series that have at least one day remaining until expiration. These two expiration series are combined to calculate a nine day expected volatility outlook. VXST is the first volatility measure to use SPX Weeklys in the calculation. Depending on where the market is in the expiration calendar one or both of the series used for the VXST calculation may be SPX Weeklys.

The level of VIX is determined by combining the next two standard (third Friday) SPX option expiration series that have at least eight days remaining until expiration. The results of this calculation is a thirty-day implied volatility measure.

3. Relationship with the S&P 500 –What’s the same –

Even casual market observers are aware of the historical inverse relationship between VIX and the S&P 500. VXST has a very similar relationship with the S&P 500. The correlation of daily price changes between VXST and the S&P 500 from 2011 to 2013 has been -0.7212. Over the same time period the correlation between VIX and the S&P 500 has been -0.8126.

What’s different –

The difference is the magnitude of price changes from VXST relative to VIX. VXST had tended to rally to higher highs and drop to lower lows. In January 2014 the S&P 500 lost about 3.5% and volatility markets were very active. During that month the closing low to high range for VXST was 9.97 to 20.84. The low to high range for VIX in January 2014 was 12.14 to 18.41.

4. Underlying Contract Settlements –What’s the same –

Both the anticipated VXST and current VIX derivative contracts are AM settled, typically on a Wednesday. Also, both VXST and VIX will be settled based on open trades in SPX options, not based on the mid-point of the bid – ask spread.

What’s different –

Since VXST is a nine day volatility measure the contract settlement value will be calculated using options that expire nine days in the future. On a non-holiday week this would be the following week’s Friday. VIX is a thirty day measure and settlement is calculated using SPX option prices from the standard expiration series of the following month. That standard series is 30 days from the VIX settlement date.

5. Historic Performance –What’s the same –

Both VXST and VIX have historically reacted to price changes in the equity market as indicated by the S&P 500. A dramatic drop in the S&P 500 has resulted in a quick move to the upside in both VXST and VIX.

What’s different –

The difference in the past has been the realized volatility of VXST and VIX. From 2011 to 2013 the 20 day realized volatility for VXST has been around 175% while the realized volatility for VIX was close to 109% over the same time period. Realized volatility is the amount of price movement that occurs over a time period – for VXST and VIX this means the average realized annualized price change over a 20 day period.

Looking Forward –Next Thursday we will start to get an idea of how futures on VXST are going to price relative to the underlying index and then a bit later we should have options trading on VXST as well. The price behavior of VIX futures and options has been unique relative to other markets, I have a funny feeling VXST is going to have some trading similarities and differences as well. I am really looking forward to finding out just how VXST derivatives behave.

Financial Markets, Futures and Options, Performance, VIX, Volatility

VIX, VXST, VXX