CBOE to create VIX measures for single stocks

By Dow Jones Newswires
Posted Jan. 5 at 5:30 p.m.

The Chicago Board Options Exchange wants investors to measure the “fear” baked into stock options such as those of Goldman Sachs or Apple.

The exchange said Wednesday it will apply the methods of its “fear index” to options on five popular stocks, the other three being Amazon.com, International Business Machines Corp., and Google. The measure, whose formal name is the CBOE Volatility Index, or VIX, shot to fame during the financial crisis as investors sought tools to measure and trade in an anxious and plunging stock market.

By using information from the prices of Standard & Poor’s 500 options, the VIX gives a statistical measure of the market’s volatility expectations via investors’ willingness to buy protective options. Applying the approach to single stocks is “the logical next step,” the company said in a release.

“You’ll be able to look on your screen and have another tool to measure the volatility” of popular stocks, CBOE Executive Vice Chairman Edward Tilly told reporters at a Chicago luncheon.

At least initially, investors won’t be able to trade the indexes or products tied to them. The VIX index has lucrative and complex derivatives that traders use to bet on moves in stock-market volatility itself. But while the VIX was introduced in 1993, futures on the measure didn’t trade until 2004 following a revision of the index’s methodology. Options weren’t launched until 2006.

Tilly said that “when we have a critical mass and following, we may turn these into tradable products” for investors aiming to take a position on an individual stock’s volatility.

Sherwin Sheik, a director in Knight Capital Group’s strategic options division, said the sector-specific nature of the stocks covered by the new volatility measures will let people use them as a proxy for volatility in banks, technology and online retailing. “It’s definitely going to be something that volatility guys are going to look at,” he said.

CBOE’s Tilly also said the company plans later this month to introduce a benchmark called the CBOE S&P 500 Skew Index, to reflect fears of extreme moves in the U.S. stock market. The aim would be to reflect worries of “black swan events” such as the crash of 1987, according to Tilly.

The skew index “measures the tail risk of S&P 500 returns and represents the price of a tradable exposure to this risk” with weighted strips of out-of-the-money S&P 500 options, according to CBOE’s Web site.

The moves come as CBOE has capitalized on the VIX’s popularity by partnering overseas to clone the measure for use in India, Canada and Australia, and also for trading in commodities markets like oil and gold.

It follows a push by rival Nasdaq OMX Group to create measures of single stocks’ performance against the broader market. Nasdaq said in October it intended to eventually let investors trade derivatives on those “Alpha Indexes,” subject to regulators’ approval.

CBOE said it will publish volatility values on the five stocks starting Friday.

Read more about the topics in this post: ,

Companies in this article


Read more about this company »

CBOE Holdings

CBOE Holdings Inc. claims it is the largest option exchange in the United States. The company, in addition to its core options trading business, provides marketplaces for trading futures contracts...

Read more about this company »

Comments are closed.