On April 24, 2023, the 1-day volatility index was launched by the Chicago Board Options Exchange, why is the new fear index the Vix1d important?
All investors will have heard of the quintessential fear index on Wall Street: the Vix, this tool helps measure market sentiment about future volatility. The classic Vix has as underlying the options of the S&P 500 index “weighing” the 30-day options.
Vix1d completely changes the perspective in the world of finance, especially professional and retail investors will have a useful tool for the short term.
Vix1d measures the volatility of the following trading day, even if it is not tradable allows you to have a more detailed view of the market, not only for intraday trading but also for the medium term. For medium term my mind means not 3-4 years but 6/12 months, I am aware of writing something against Murphy’s manual but being an options trader I have a more technical view of the financial markets.
CBOE created (perhaps) Vix1d to bridge the gap between professionals and regular investors to better inform the “little ones” about intraday volatility conditions.
Very important for those who do not know the world of options, many options trades on the S&P 500 index have contracts that expire on the same day, this helps traders to have more precise positions on important economic events (an example is the calendar of key events such as Fed meeting, monetary policy).
This “intraday” activity is not included in the calculation of the classic Vix, if you look at the trading volumes, open interest you will notice that there was a surge in trading on the same day because new types of very short-term contracts were created.
Traditional 30-day Vix index launched in the 90s does not have the same sensitivity on the market as the new Vix1d because we are talking about two different types of volatility, this could be a good choice on the one hand to make all investors more informed, on the other hand, however, according to my point of view there could be an increase in volumes out of control on daily options creating situations like Game Stop etc …
Short squeezes could be more habitual than rare events, this would undermine the stability of financial markets that are already in the hands of powerful algorithms (high frequency trading).
Keyword: Short squeeze is when the value of a financial instrument rises forcing traders who had bet downwards to buy it again to avoid greater losses. It is an upward speculation where those who have pressed the sell button must cover themselves by escaping from the position creating volumes in the very short term. There are also exceptions as in the case of Gamestop.
(There is also the long squeeze is the opposite)