The Option Pit VIX Traffic Light is Yellow: Volatility Is Likely To Move Wildly.

Hey Traders,

The VIX is lower for the third day in a row … though it still remains stubbornly above the 20-handle …

With traders looking ahead to Thursday’s consumer price index (CPI) numbers, we may not see any major moves until the results are in.

However, in the meantime, the Cboe made an announcement about a new set of options offerings that could make a significant impact on the VIX.

The Cboe has announced that it will list S&P 500 (Ticker: SPX) options that expire on Tuesdays and Thursdays, starting in the second or third quarter of 2022.

If these options make it through regulatory review and hit the markets, that means that Cboe now offers SPX weekly options with expirations on every trading day of the week.

What does this have to do with VIX?

Recall that VIX measures 30-day market volatility expectations by measuring the implied volatility (IV) of SPX options.

It looks at both near-term and next-term weekly options in the SPX – that is, options expiring on the Friday before and Friday after the 30-day time horizon, weighting each contract to come up with a net 30-day calculation.

However, with the introduction of new SPX options, traders will now have more choices about where to put their money.

If these new expiration options draw volume out of the standard expiration and weekly Friday expiration options, we could see this actually change the reactivity and movements of the VIX!

Why?

With more volume flowing into options that the VIX doesn’t look at, this could actually serve to keep the VIX generally LOWER, as the demand for the options it does look at will be lower, thus keeping IVs relatively muted compared to what we typically see.

Does this mean the end of the VIX?

No, but it could mean changes are in store.

The Cboe MIGHT change the calculation and construction of the VIX to remedy the issue. This might involve the VIX now looking at all of the SPX daily options and adjusting for the 30-day time horizon, especially if we begin to see significant activity in these new options.

The Cboe has restructured the VIX before, so it is not out of the question. They will want VIX to remain a valuable, relevant volatility tool, and they would not want to firebomb their own product.

We will be keeping an eye on when these new SPX options hit the market, and how much volume they seem to be pulling away from traditional SPX options.

Your Only Option,

Mark Sebastian