Schaeffer's Trading Floor Blog

Monday Morning Quarterback-ing the VXST Options Debut

A look at VXST options after Day 1

by 4/11/2014 7:32 AM
Stocks quoted in this article:

The volume in CBOE Short-Term Volatility Index (VXST) options didn't look enormous on Day 1 … but hey, give it some time! They certainly picked an interesting day to launch. Maybe too interesting … hmm. I'm wondering if we tend to get volatility explosions on days when new volatility derivatives list. I mean, think about it: what better way to market hedging instruments than list them on pre-scheduled Crash Days?

Okay, I'm kidding. It's obviously coincidental.

What do you get if you trade VXST as opposed to the CBOE Volatility Index (VIX)? Like we noted yesterday, more volatility! But in a good way, in the sense that that's what you want to capture with VXST.

Here's how it looked between mid-November (the start of continuous calculation, I believe) and yesterday, a little before the market imploded (click chart to enlarge):

VXST since mid-November
Chart courtesy of TD Ameritrade

It looks a lot like VIX, right?

It does, but with a little more oomph. VIX's range over that same stretch is a low of 11.69 and a high of 21.48. It moved at an average realized volatility (RV) of about 90, with a peak RV of 200. Compare that with VXST, which peaked at about 280 RV, and averaged maybe 130 RV or so. VXST hit a high of 24.23 and a low of 9.75.

Now, that's all to be expected. The shorter term the volatility index, the more it reacts to the here and now of RV in the market itself. VIX always moves more than the CBOE S&P500 3-M Volatility (the three-month VIX), for example. But having said that, here's how VXST compares to VIX over the last half-year (click chart to enlarge):

VXST vs VIX over last six months
Chart courtesy of TD Ameritrade

Again, shorter-term options just simply react more than longer-term options. Over time, this ratio will likely proxy when sentiment becomes a bit extreme. If VXST is 15%-20% above VIX, for example, it's probably time to start looking to fade a market sell-off. Like any sentiment indicator, though, it's going to go way past the station at times. I imagine if we had this back in 2008, VXST would have gotten 50%-100% above VIX.

VXST options reflect the expectation that it will move with greater volatility than VIX. Options expiring next week carried a 120 implied volatility in VXST before the meltdown, versus about 90 in VIX. So, if you're playing in advance for a very near-term volatility pop, you will have to pay up.

VXST is definitely a promising new product. We won't know for a while whether it catches on, but I'm hoping it will.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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