One thing Matthew Tym has learned in two decades as a derivatives trader is to make sure he understands something before using it. That lesson is guiding his view of Wall Street’s brand-new fear gauge.
(Bloomberg) — One thing Matthew Tym has learned in two decades as a derivatives trader is to make sure he understands something before using it. That lesson is guiding his view of Wall Street’s brand-new fear gauge.
The Cboe 1-Day Volatility Index (ticker VIX1D) launched Monday as a way of distilling the price impact of a trading boom in options with a shelf life of less than 24 hours. But most market pros, like the head of equity derivatives trading at Cantor Fitzgerald LP, watched bemused from the sidelines as a series of big moves unfolded.
It opened at 8.55, compared with a reference point of 13.27 on Friday, surged as high as 9.88 before pulling back to 9.75 as of 3 p.m. in New York.
“I have no idea what it’s pricing,” said Tym.
The one-day VIX — which tracks the expected volatility of the S&P 500 based on options with maturities of about 24 trading hours — is supposed to shed fresh light on investor sentiment over ultra-short time frames. Exactly what to make of those numbers was the question bedeviling even the most experienced market pros on Monday.
True to its billing, the new indicator moved with a freneticism not captured in its longer-dated cousins. Rather than fall, the VIX — the tried-and-true benchmark volatility index that has been a staple in traders’ toolboxes since the 1990s — rose, adding 0.3 point. The S&P 500 was little changed.
“It’s very hard to put into context, being the first day going live,” said Steve Sosnick, the chief strategist at Interactive Brokers. “There are plenty of reasons to expect that index to be volatile. Markets can move substantially — or do nothing — on any given day.”
It remains to be seen if Wall Street pros will find a use for the one-day VIX akin to the seminal role played by the longer-dated version, which was conceived three decades ago by Cboe Global Markets Inc. One complicating factor is the lifespan of the instruments it tracks. While the standard VIX can be thought of as an estimate of stock turbulence a month hence, the single-day version’s vastly shorter time horizon may make it a litmus for particularly chaotic market views: one measured in hours, rather than days or weeks.
Traders have flocked to options with zero days to expiration, or 0DTE, since the Chicago-based exchange operator expanded contract expirations to every weekday in mid-2022 and as the Federal Reserve’s aggressive monetary tightening spurred market volatility. Right now, the flashy contracts make up about half of S&P 500 options trading volume.
The VIX1D was introduced partly in response to the swift migration to short-dated options contracts — activity that is not captured by its older counterparts, according to Rob Hocking, Cboe’s global head of product innovation. For now, the exchange has no immediate plans to launch futures or options products linked to the one-day VIX, he said.
Investors tend to pile into 0DTE options when economic data such as inflation and Fed policy meetings are on deck, seeking to make quick profits or hedge positions around events that have in the past year swung markets in big and unpredictable ways. The one-day decline on its first day bucked gains in volatility measures with longer tenors, showing the index working as designed given Monday was a relatively uneventful session, according to Hocking.
“I wouldn’t call it a discrepancy,” he said. “In days where it’s calm, you’re going to tend to see a one-day VIX number trading most likely below the 30-day number. And on days where all of a sudden you have an FOMC announcement or a jobs report, you’re going to see that number trending above the 30-day number.”
Read more: Feeding VIX Swoon Is Shrinking Size of S&P 500 Relief Rallies
The S&P 500 on Monday swung between gains and losses as traders awaited upcoming earnings from tech giants such as Microsoft Corp. and Friday’s data on first-quarter gross domestic product to gauge the prospect of an economic recession.
To Chris Murphy, co-head of derivatives strategy at Susquehanna International Group, the one-day VIX’s closing price is more useful than intraday moves in that it signals what’s expected for the next session in the options market.
“We have a lot of data on Friday, so seeing where it closes on Thursday will be interesting,” he said.
Still, to Tym at Cantor, the added value from the new tool is limited, at least for now.
“What do you do with this? Can’t trade it,” he said. “I can look at the at-the-money straddle to get a much better view of expected volatility for the day,” he added, referring to a strategy that buys an equal number of calls and puts with the same strike price and expiration date.
–With assistance from Sam Potter.
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