April 2018 marks the 25th anniversary of the introduction of the Cboe Volatility Index® (VIX® Index) and during this month, information about the history of the VIX Index and the introduction of tradeable VIX products has been shared.

Twenty-five years after the launch of the VIX Index (which measures 30-day expected volatility of the S&P 500 Index), Cboe introduced a new volatility index – the Cboe One-Year Volatility IndexSM (ticker: VIX1Y) – that measures that one-year expected volatility of the S&P 500 Index.  This is the fifth volatility index based on SPX option pricing.  All five volatility indexes are calculated using the VIX Index methodology and measure expected volatility over varying time frames.  The table below identifies the indexes, the time frame covered by the indexes and their ticker symbols.

VIX1Y-1

Data Source:  Cboe Global Markets

VIX1Y uses AM-settled SPX options with standard 3rd Friday expirations dates in calendar quarter months on the March expiration cycle.  The components are at- and out-of-the money put and call options with expiration dates that bracket a 366-day target timeframe.   

Cboe’s Multi-Asset Solutions Group has calculated VIX1Y data going back to January 2007.  This provides over 11 years of data to observe the behavior of this new index.  The chart below shows the high, low, and average of the VIX1Y by year with 2018 representing the first quarter.

VIX1Y-2

Data Source:  Cboe Global Markets

Since January 2007, the lowest close for the VIX1Y was 13.65 on April 17, 2007 and the highest close was 52.78 on November 20, 2008.  Over the same period of time, the lowest close for the VIX Index was 9.14 on November 3, 2017 and the highest close was 80.86 (also) on November 20, 2008.  From January 2007 through the end of the first quarter of 2018, the average close for VIX1Y has been 23.00 and the average close for the VIX Index has been 19.80. 

For several years market watchers have had published measures of expected volatility of the S&P 500 Index ranging from 9-days to 6-months; now there is a tool that stretches that to 1 year.  A term structure chart is a common method of comparing the different time frames and, with the addition of VIX1Y data, we have the ability to compare the relationship among different time frames for expected volatility.  The chart below provides term structure data comparing the average for the five volatility indexes identified above for the time period of 2017 through the end the first quarter of 2018. 

VIX1Y-3

Data Source:  Cboe Global Markets

The chart above shows a difference between the average prices for these five volatility indexes in 2017 through the end of  the first quarter of this year.  All volatility indexes have closed at higher averages this year when compared to 2017.  The flatness of the average curve for 2018 may be attributed to some uncertainty about the future direction of the markets.  When the VIX term structure is flat, heightened uncertainty is often cited as a reason. 

The introduction of the One-Year VIX adds another tool to analyze the market’s expectations for volatility.  With five different measures of expected volatility covering a variety of time frames, analysts now have the opportunity to observe expected volatility over several time frames as well the ability to observe the relationship between the various volatility indexes.