1. Introduction to VIX
1. What is VIX
The full name of VIX is the Chicago Board Options Exchange Volatility Index (Chicago Board Options Exchange Volatility Index), which is used to measure the expected annualized volatility of the S&P 500 index in the next 30 days. In options trading, implied volatility represents the expectation of the future risk of the market, so VIX is often regarded as a leading light for the market. A high VIX market mostly means the spread of panic, so overseas VIX is also called "panic index".
2. How to compile the VIX index
As we all know, stock indexes are calculated by weighting the prices of constituent stocks. Similarly, the VIX index is composed of options on the S&P500 index, and the price of each option reflects the market's expectations for future volatility. Like traditional index calculations, VIX selects options based on criteria, and then weights the options according to a formula. The VIX index calculates the 30-day expected volatility of the S&P500 index. Its "component options" are the near-term and next-term CBOE S&P500 index options, usually this month and the next month's contract (expiry time is T1, T2 respectively), and the near-term The contract requires that the expiration time must be greater than one week.
3. VIX event
2. Trend of VIX
Since its launch in 1990, the average value of the VIX index is 19.27, the minimum value is 9.14, and the highest value reached 89.53 within a day during the sharp market fluctuations brought about by the global financial crisis in 2008. Historically, the overall trend of the VIX index and the S&P500 index has shown a negative correlation. When the market is rising steadily, the VIX index usually declines slowly; when the market fluctuates and falls, the VIX index usually rises rapidly. Since its launch in 1990, the correlation coefficient between the VIX index and the S&P500 index has been -18%. After 2000, due to increased market volatility, the correlation coefficient between the VIX index and the S&P500 index has increased to -51%.
The VIX index has risen sharply since 2018. At the beginning of the year, the U.S. stock market fluctuated sharply. The S&P500 index fell rapidly from 2872.87 points to a minimum of 2532.69 points, driving the VIX index to rise to 37.32. However, driven by bright U.S. economic data and a strong dollar, the market returned to an upward trajectory, and the VIX index also fell back. Now that the U.S. economy is relatively stable, it is expected that the VIX index will remain low and fluctuate in the short to medium term.
3. VIX derivatives and their functions
1. VIX futures
VIX futures (Cboe Volatility Index (VX) Futures) is a cash-settled futures product based on the VIX index. VIX futures purely play a role in implied volatility and have nothing to do with the direction and level of stock prices; VIX futures can also provide an effective way to hedge stock returns and diversify portfolios.
Usually VIX futures rollover is 8 months, the expiration date is the third Wednesday of the month, and the last trading day is the working day before the expiration date. VIX futures expiration date and last trading day are the key information in VIX derivatives trading.
2. VIX options
VIX options are cash-settled option products with reference to VIX. VIX options are different from stock options, because the VIX index itself has no spot products, and the non-arbitrage principle of many derivatives cannot be simply applied.
VIX options have several characteristics that differentiate them from most stock and index options, including: pricing based on VIX futures value; pricing that can vary for many reasons; Wednesday settlement; special opening quotes; volatility.
3. VIX ETP
VIX ETP is a listed trading product based on VIX futures issued by investment banks and fund companies. Depending on the establishment structure, there are funds (Fund) and notes (Note)
ETF - Exchange Traded Fund: It is a special type of open-end fund, which combines the operating characteristics of closed-end funds and open-end funds. Investors buy and sell an ETF, which is equivalent to buying and selling the index it tracks, and can obtain basically the same income as the index. Usually, a completely passive management method is adopted, with the goal of fitting a certain index, which has the characteristics of both stocks and index funds. Such products include SVXY, UVXY, VIXY, VIXM, VMIN, VMAX, etc.
ETN—Exchange-traded notes: Generally, it is a bond product issued by an investment bank, which combines some features of bonds and ETFs. It differs from other forms of bonds in that ETNs are paid based on the return of a specific market index minus necessary fees, do not pay fixed interest, and do not guarantee principal.
VIX ETP products usually track a variety of VIX futures indexes with different periods, which are divided into forward and reverse returns; in addition, depending on the leverage used, they can also be divided into double and double returns.
4. Other volatility indices
The VIX index is the most common volatility index, but CBOE also offers volatility indices for U.S. stock indexes, interest rates, commodity-related ETFs and currency futures. In addition to the VIX index, volatility indices for US stock indexes include: S&P 100 Volatility Index (VXO), Nasdaq Volatility Index (VXN), Russell 2000 Volatility Index (RVX), Short-Term Volatility Index (VXST) , 3-month volatility index (VXT) and medium-term volatility index (VXMT), etc.
The 10-Year Treasury Volatility Index (TYVIX) and the Interest Rate Swap Volatility Index (SRVIX) are indices that measure interest rate volatility. The TYVIX index measures the 30-day market expected volatility of the 10-year U.S. bond futures price. When the 10-year Treasury bond and futures prices fluctuate sharply, especially when they plummet, the TYVIX index often shows an upward trend. The SRVIX index is the first standardized product to measure the volatility of the interest rate swap market, making it easier to trade the interest rate swap market. At present, the market has become the largest OTC derivatives market, with notional funds reaching trillions.
The Euro Volatility Index (EUVIX) measures the implied volatility of euro-related options. Similarly, CBOE also has volatility indices for gold, silver and oil ETFs: Gold ETF Volatility Index (GVZ), Silver ETF Volatility Index (VXSLV) and Crude Oil ETF Volatility Index (OVX), respectively based on the world's largest gold ETF fund SPDR Gold Shares, the largest silver ETF fund iShares Silver Trust and the United States Oil Index Fund (USO) are the benchmarks.
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