The Need For Speed: How Cboe's New Volatility Index is Built to Track Next-Day Expectations

Cboe's New Volatility Index Built to Track Next-Day Expectations

The original Cboe Volatility Index just marked its 30th anniversary. The VIX, as it's commonly known, was launched in April 1993 as a way to measure expected volatility of the S&P 500. How? By distilling the prices of thousands of different options contracts into a single number. Rightly or wrongly, the VIX and its easy quote became Wall Street's "fear gauge." It provided- and still provides – a good look forward at investor expectations for 30 days' worth of market volatility.

But for options traders going Mach 2 with their hair on fire, a month is not good enough.

"You don't have time to think up there."

Into the fray, then, comes the VIX1D, the Cboe's new 1-Day Volatility Index. Launched on April 24, the latest innovation from the world's largest options exchange was built to measure the expected volatility of the S&P 500 over the next day of trading — a single number, in other words, representing what's directly in front of you.

More than a marketing gimmick (Cboe publishes a nine-day, six-month, and one-year VIX that don't do much), the VIX1D is a response to a surge in the use of extremely short-dated options. Strategies employing so-called zero-day options -- contracts that expire on the same day they are purchased -- have surged in popularity since the start of the covid pandemic. A Bank of America report indicates that about 45% of S&P 500 options volume on a typical day now comes from single-day options.