There is a regular drum beat in the financial services arena about a “new asset class” or the “next asset class”, many of which really aren’t actually new.
In recent years, volatility has checked most, if not all, of the boxes for a new asset class. The space has been dominated by the CBOE Volatility Index, better known as the VIX or “fear gauge.” But now a new volatility instrument has emerged, the VolDex, which teams Chicago-based options index firm NationsShares with the International Securities Exchange (ISE).
Scott Nations, president and CIO of NationsShares, says his VolDex index, on which the ISE is developing new options and possibly futures contracts, is the next generation volatility index that will address the needs of market users. ISE and his firm are working now to launch new options and futures contracts on the index.
“Whenever anybody sat back down at their desk, and they wanted to know where the options markets were, they would talk about at the money volatility,” Nations said. “Nobody has ever walked into a pit or sat back down at a desk and said “Please tell me what a strike price weighted average of every option trading in the front two months would be.'”
Nations said traders want to know at the money options volatility because it offers the clearest information to them. The NationsShares’ VolDex measures the SPY, the ETF options on the Spider, or S&P 500 ETF in the current month and next month which bracket “at the money.”
The VIX, on the other hand, measures every option with a non-zero bid in the front two months. Nations said that the VIX has a level of complexity that creates “noise that drowns out what we really want to hear.”
Nations believes VolDex will become an alternative to the VIX and will also be complementary, creating spreading opportunities.
“We also realize that because of the difference in the way the two are constructed, that people will learn to trade one against the other,” he said. “If you wanted to isolate the impact of those out-of-the-money options, then you could trade, spread VIX versus VolDex. So we think both of those markets will be important for us.”
The VolDex is currently being calculated and published realtime with the ticker name VOLI.
“The potential for any volatility product right now is tremendous,” Nations said. “Volatility is the asset class that people are really paying attention to right now.”