After the introduction of the index in 1993 and the change of its way of
calculation in 2003, in 2004 had been launched the first exchange-traded VIX
futures contracts on the new, all-electronic CBOE Futures ExchangeSM (CFE®). It
was only two years after the launch of the futures that the first options on
the VIX index were created (in February of 2006). The options written on the
index have been considered by many investors and academics as the most
successful product of the CBOE.
Then in 2008, CBOE advanced the use of the VIX methodology to estimate
implied volatility of certain commodities and foreign currencies (www.cboe.com).
For example, the CBOE U.S. Energy Sector ETF Volatility Index (VXXLESM) CBOE
Emerging Markets ETF Volatility Index (VXEEMSM) etc. Each of these volatility
indices are calculated using exchange traded funds (ETF’s).
The development of the index did not stop at that point. In 2014 CBOE improved
the VIX Index, it included a series of SPX WeeklysSM (ticker symbol “SPXW”).
SPX WeeklySM are options based on S 500 with weekly expiration. Nowadays
the CBOE bargains tree type of SPWX, the SPXW Friday weeklys, the SPXW
Wednesday and SPXW Monday Weeklys. SPXW can be used on targeted buying, selling
or spreading strategies. Specifically, SPXW Weeklys may help investors
efficiently benefit of market events, like government reports and announcements.
The SPXW was introduced in 2005. Weekly options are now available on too many of
indexes, ETFs, ETNs and equities. They have become very popular and
actively-traded especially as a hedging toolDT1 .
As mentioned, the importance of the index was recognized soon after it
was launched. But what exactly makes an index important and what is its precise
meaning is? The answer is mainly the comparison of its current price with previous
In order to
understand and take full advantage of the index an investor can study Figure 2. It shows week-ending levels of
S 500 and VIX from the beginning of January 1990 through November 2016.
Many observations are remarkable. It is obvious
that VIX reached one of its highest levels in October 20, 2008 (the higher one
since October 1987, which according to Whaley 2008, is the only time VIX ever
On October of 2008 another global financial
crisis occurred. A crisis which started soon after the bankruptcy of Lehman on
September of 2008. Another interesting phenomenon is that the index is quite volatile
with many peaks. Some indicative dates are, early 1991 when U.S.A forces
attacked Iraq and mid-1990 when Iraq invaded Kuwait. Then two sharp spikes occurred
on October of 1997 and 1998. On 1997 occurred a sell-off which resulted in the
drop of 555 points of Dow (Whaley, 2008). The 1998 spike occurred in a period of
general anxiety. Investors were afraid of a possible drop in the prices and
wanted to secure their investments. On 2001 and 2002 happened two other spikes,
2001 was because of Enron bankruptcy and 2002 was because many internet companies
bankrupt (e.g Webvan, Exodus Communications, and Pets.com). Another spike
started at the end of 2009 and mainly on 2010, the “European crisis” as it has
been characterized. A crisis caused because of the incapability of many European
countries to repay or refinance their government debt or even to bail out over-indebted
banks under their national supervision without the assistance of third parties
DT1The inclusi?n ?f SPX Weeklys all?ws
the VIX Index t? be calculated with S 500 Index ?pti?n series that m?st
precisely match the 30-day target timeframe f?r expected v?latility that the
VIX Index is intended t? represent. Using SPX ?pti?ns with m?re than 23 days
and less than 37 days t? expirati?n ensures that the VIX Index will always
reflect an interp?lati?n ?f tw? p?ints al?ng the S 500 v?latility term