The world’s largest options exchange, nearing 50 years since its founding, plans to follow the launch of its one-day volatility index with more tools that capture near-term market swings.
On Monday, Cboe Global Markets Inc., the firm behind the Cboe Volatility Index (ticker VIX), known as Wall Street’s “fear gauge,” started the VIX1D Index, which measures volatility over a single day. This followed the exchange’s expansion of “zero-day-to-expiry” options, or 0DTE, in 2022.
“It’s the continuation of being able to measure and provide to the marketplace a benchmark that shows the market what volatility is at different tenors,” Cboe Chief Executive Officer Ed Tilly said in an interview ahead of the VIX1D launch.
Since last year, when the exchange expanded trading to all five days of the work week, zero-day options have become wildly popular. In March, the Chicago-based Cboe estimated that 0DTE derivatives made up more than 40% of S&P 500 options trading volume this year, up from around 20% in the first quarter of 2022.
Critics say these short-dated options could threaten market stability. JPMorgan Chase & Co.’s Marko Kolanovic warned in February that they could create a situation similar to the early-2018 volatility implosion called Volmageddon.
But Tilly disagrees with that view. These daily options settle in cash and expire at the end of the day, instead of carrying the position over to the following day, which he said reduces risk.
When asked by Bloomberg TV on Tuesday why there was a need for a one-day VIX when investors could simply look at the cash markets, Tilly said the option product gives you “much more information” since “it’s how investors are pricing insurance on those underlying positions.”
“So much of that S&P 500 volume is in the one- and two days,” he said, “we needed to show and help investors measure that volatility in the short term.”
Cboe, previously known as the Chicago Board Options Exchange, got its start on April 26, 1973. On its first day of business, 911 call options were placed on 16 stocks (put trading would come later). In March 2023, the exchange hit a high of 22.5 million contracts in a single day. The US options market has seen record volume for the last three years, with more than 10 billion contracts traded in 2022. This year it is expected to reach more than 11.6 billion contracts.
The Cboe Volatility Index, created in 1993, measures volatility using S&P 500 Index options that expire 23 to 37 days into the future. Now, investors have access to a broader suite of volatility products, including the VIX one-year, 6-month, 3-month and 9-day indexes.
There could be more short-term products to come, based on investors’ appetite to hedge risk through various instruments, according to Tilly, who began his career as a trading floor clerk at Cboe in 1987.
“The market wants to react to all the news and surprises that comes out on a regular basis,” he said. “We, by design, have been adding more tools to allow more exposure.”
The firm expanded in Europe, Asia and North America with the acquisition of Aequitas Innovations Inc., the parent of Toronto-based NEO Exchange, in 2021. China and India are two markets that remain “untapped by Cboe,” Tilly said, though he notes that a lack of a clear path for competition poses challenges for new exchanges to enter the regions.
“We’re not finished expanding into geographies that allow for competition, and want to be there at scale,” Tilly said.
Tilly told Bloomberg TV that Cboe’s expansion would involve more hiring — “it’s very important for us to have an engaged team looking for what’s next.” And he said that he was looking forward to engaging with Chicago mayor-elect Brandon Johnson for ways to be present in the community.
“Cboe is committed to Chicago,” Tilly said. “We want to work with this mayor. We want to find solutions.”
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