Wall Street Is Getting a New Fear Gauge as 0DTE Mutes VIX
Comment of the Day

April 27 2023

Commentary by Eoin Treacy

Wall Street Is Getting a New Fear Gauge as 0DTE Mutes VIX

This article from Bloomberg may be of interest. Here is a section: 

Cboe Global Markets Inc., the Chicago-based exchange operator behind the VIX, has announced that a new one-day version of its flagship volatility index is poised to launch. The Cboe 1-Day Volatility Index (ticker VIX1D) is scheduled to start Monday, according to a notice on Cboe’s website. 

If it succeeds in capturing the sentiment embedded in in 0DTE options, it could mark a significant moment for investors and traders across the spectrum.

“This makes sense because so much of the volume has moved to shorter tenors,” said Amy Wu Silverman, head of derivatives strategy at RBC Capital Markets. “I’ve been joking that the VIX is going through a mid-life crisis, being replaced by someone younger (shorter dates).”

There is already some evidence that nearer-term options have been flashing more stress than the VIX. Cboe offers a nine-day version of the gauge (VIX9D), which has regularly traded at higher levels than the VIX this year. 

Eoin Treacy's view

The jump in demand for zero day options has been a major factor in the surge in intraday trading activity this year. That’s resulted in the 90-day VIX calculation not reflecting the volatility of where the majority of volume is traded. The new 1-day VIX and 9-day VIX measures are aimed at remedying that disparity.

1-day VIX was up in a dynamic manner today, even as the regular VIX index contracted in a dynamic manner. By looking at the spread we can see this is not especially unusual. Unfortunately, we do not have enough back history to tell how much of a disparity represents a meaningful signal.

The VVIX volatility of the VIX Index remains in the region of the pre-pandemic troughs which gives free rein to automated funds to hold larger positions. That’s a contributing factor to the relative stability of the major indices.

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