Edward Tilly, Chairman & CEO of Cboe Global Markets writes here about the 25th anniversary of the VIX.
It is hard to believe it has been 25 years.
April marked the 25th anniversary of the Cboe Volatility Index® (VIX® Index). When Cboe launched the VIX Index on April 13, 1993, we knew that it had the potential to become a unique tool for the market and it quickly became one of the most recognized measures of U.S. equity market volatility.
Risk and volatility have always been fundamental components of the markets; however, measuring the market’s current perception of future volatility was not always easily achieved. Prior to 1993, market volatility was calculated using historical prices and market participants were limited to knowing how much volatility had occurred in the past.
The concept for the first VIX Index was designed and developed for Cboe by Dr. Robert Whaley, currently a professor at Vanderbilt University’s Owen Graduate School of Management, and was articulated in “Derivatives on Market Volatility: Hedging Tools Long Overdue,” published by the Journal of Derivatives in 1993.
The original VIX Index was calculated using prices of Standard & Poor’s 100 Index (OEX) options, which in the 1980 and 1990s was one of the most heavily traded options class. Ten years later, responding to an evolving U.S. equity market that increasingly focused on the S&P 500® Index (SPXSM), Cboe, with input from Goldman Sachs, reformulated the VIX Index methodology.
Since 2003, the VIX Index has been based on the S&P 500 Index and estimates expected volatility by averaging the weighted prices of SPX puts and calls over a wide range of strike prices.
The VIX Index was the first index designed to measure the market’s expectation of constant, 30-day expected volatility of the U.S. stock market, derived from real-time, mid-quote prices of SPX call and put options.
Cboe later introduced trading of VIX futures in 2004 and VIX options in 2006.
Since the end of the Financial Crisis in 2009, VIX futures and VIX options volume has grown on average 68 percent and 24 percent each year, respectively, to a million contracts per day combined in 2017. This included ongoing growth in both very high and low volatility periods – and all points in between.
Managing market volatility through common derivatives strategies is now a typical part of portfolio protection. This to me is the most extraordinary aspect of VIX derivatives products. That we have evolved from a market that not so long ago was the domain of niche professionals to one that provides investors with opportunities for portfolio protection.
Over the past 25 years, VIX products have provided the marketplace with opportunities to hedge portfolios against market downturns, manage portfolio risk and smooth out volatility, and buffer the effects of geopolitical turmoil. During this time, Cboe has worked with market participants to enhance VIX futures and options trading and provided education regarding the products that trade on our markets.
The VIX Index methodology is now used globally to calculate volatility expectations in equities markets across North America, Asia and Europe.
We believe we are still at the edge of innovation when it comes to our VIX product offerings. Just this month, we launched the Cboe One-Year Volatility Index (VIX1Y), which measures up-to-the-minute market estimates for one-year volatility. The introduction of VIX1Y will provide the marketplace with the opportunity to track the relative movement of one-month and one-year expected volatility. We expect VIX1Y to be a useful measure for those with longer-duration liabilities like insurance companies and pension funds.
In addition to the 25th anniversary of the VIX Index, April marked the 45th anniversary of Cboe Global Markets. Cboe has a long history of innovation, with our development of the VIX Index and derivatives just one example. We couldn’t be more enthusiastic about the opportunities that lie ahead.