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CBOE New Product: Short-Term Volatility Index

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**Special Feature from the CBOE's Options Institute**

Russell Rhoads, CFA is an instructor with The Options Institute at the Chicago Board Options Exchange. He is a financial author and editor having contributed to multiple magazines and edited several books for Wiley publishing. In 2008 he wrote Candlestick Charting For Dummies and is the author of Option Spread Trading: A Comprehensive Guide to Strategies and Tactics. Russell also wrote Trading VIX Derivatives: Trading and Hedging Strategies using VIX Futures, Options and Exchange-Traded Notes. In addition to his duties for the CBOE, he instructs a graduate level options course at the University of Illinois - Chicago and acts as an instructor for the Options Industry Council.

Chicago Board Options Exchange (CBOE) rolled out a new volatility index on Tuesday at the Second Annual European CBOE Risk Management Conference in Sintra, Portugal, the CBOE S&P 500 Short-Term Volatility Index (VXST), which is a measure of the nine-day version of the CBOE Volatility Index (VIX). The VXST level is determined using the same industry standard methodology used to calculate VIX. However, the VXST calculation will focus on short-dated SPX options contracts and will be the first volatility measure to take into account SPX Weeklys pricing. Daily it is common for 40% of SPX-related option trading to be in contracts that expire in the next 10 days. This new index is a great way to capture the implied volatility that is indicated by the pricing of these options.

In the first phase of the roll out for VXST the daily close will be posted on the CBOE's website. By year end the plan is to have live quotes and following that VXST option and futures trading. For now the best use is as a market indicator. One way to look at VXST is in relation to VIX and the 3-Month Volatility Index (VXVR) which measures 93-day implied volatility. CBOE has calculated closing prices for VXST going back to the first day of 2011. Those interested in comparing nine day-implied volatility to 30-day implied volatility of SPX options have almost three years of data to work with. This chart below shows the daily price changes for VXST, VIX and VXV from January 2011 through September 2013.

The chart shows the relationship among the three volatility indexes. Note that VXST moves around much more than the other two to the upside and downside. There is another way to monitor this relationship which will appear somewhat familiar to anyone that has taken a look at the curve of VIX futures prices. A curve may be created using VXST, VIX, and VIX pricing to demonstrate the different relative volatility levels over time.

The curves on this second chart depict the closing prices for VXST, VIX, and VXV with respect to the number of days each index represents. Also, the blue curve shows the closing prices for Monday of this week and the red line shows Tuesday's closing prices. Combining nine-day, 30-day, and 93-day implied volatility measures creates a more dynamic curve than the VIX futures curve. A curve created with VXST, VIX and VXV that has gone from contango to backwardation frequently based on the historical pricing that CBOE has created.

With the creation of the short-term volatility index CBOE has added another tool for all levels of traders to monitor short-term market volatility. If you want to play around with the data or learn more about this new index more information can be found at

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