VolDex® Implied Volatility Indexes

AAA

DEFINITION of 'VolDex® Implied Volatility Indexes '

A measure of option cost and implied volatility. The VolDex® Implied Volatility Indexes generally refers to the Large Cap VolDex and is a measure of expectations for market volatility over the next 30 days as expressed by options on the SPDR S&P 500 ETF, which are the most liquid options in the world. The VolDex index is one of a family of implied volatility indexes developed by NationsShares, an independent developer of option-based indexes. Nations claims that its VolDex indexes are a superior and investable measure of option cost and implied volatility because they measure the cost of options in the same way that options users do, by using a limited number of at-the-money options.

INVESTOPEDIA EXPLAINS 'VolDex® Implied Volatility Indexes '

According to NationsShares, its Large Cap VolDex has a number of advantages over the CBOE Volatility index (the “VIX”), which is the most widely followed measure of market volatility, which include the following –

  • The VolDex focuses on at-the-money options, which are generally the most liquid and provide the clearest indication of market expectations for volatility. The VIX, on the other hand, uses a variable number of options that can number as many as 200 and that change by the second; many of these options are deep out-of-the-money options that are rarely used by market participants to hedge risk.
  • The underlying security for the Large Cap VolDex is the SPDR S&P 500 ETF, which is extremely liquid, as are the options on it. The VIX uses options on the S&P 500 index itself, which are much less liquid and have very wide bid/ask spreads.
  • NationsShares says that the VIX has misleading statistical noise created by the distance between strike prices, the number of strike prices listed, the frequent change in the number of constituent options, and option skew. It also consistently overstates implied volatility. NationsShares claims the VolDex provides a more robust and accurate measure of implied volatility because it removes noise generated by options skew.
  • Overall, NationsShares notes that its VolDex indexes provide a clearer measure of expectations for near-term volatility because they use a fewer, fixed number of very liquid at-the-money options. The limited number of inputs compared with the VIX also substantially improves the investability of the VolDex.

 

RELATED TERMS
  1. Index Investing

    A form of passive investing that aims to generate the same rate ...
  2. Enhanced Indexing

    An investment philosophy that attempts to amplify the returns ...
  3. Dow Jones Sustainability United ...

    A free-float market capitalization weighted index that captures ...
  4. Index Hugger

    A managed mutual fund that tends to perform much like a benchmark ...
  5. Dow Jones EURO STOXX Sustainability ...

    A stock index that measures the financial performance of leading ...
  6. Index Fund

    A type of mutual fund with a portfolio constructed to match or ...
RELATED FAQS
  1. What technical skills must one possess to trade options?

    An option is a financial derivative that gives you (as the buyer or holder) the right to buy or sell an underlying security ... Read Full Answer >>
  2. Do options make more sense during bull or bear markets?

    Options and various option strategies can be used in bull and bear markets. Certain option strategies can be used to profit ... Read Full Answer >>
  3. What is an option's implied volatility and how is it calculated?

    Implied volatility is a parameter part of an option pricing model, such as the Black-Scholes model, that gives the market ... Read Full Answer >>
  4. How are call options priced?

    A call option provides an investor the right to purchase a stock, bond or other underlying security at a specific purchase ... Read Full Answer >>
  5. What is a volatility smile?

    A volatility smile is a geographical pattern of implied volatility for a series of options that has the same expiration date. ... Read Full Answer >>
  6. If a LEAP option is purchased and held for more than 12 months, is the tax treatment ...

    A LEAP (long-term equity anticipation security) is a call or put option that allows the buyer a long-term expiration on the ... Read Full Answer >>
Related Articles
  1. Investing Basics

    An Introduction To Stock Market Indexes

    Investopedia explains the five most talked about indexes and what makes them all different.
  2. Mutual Funds & ETFs

    Introduction To Fundamentally Weighted Index Investing

    If you believe the market smiles on those who focus on value, growth or income, this vehicle may be for you.
  3. Active Trading Fundamentals

    Tracking Volatility: How The VIX Is Calculated

    When market volatility spikes or stalls, newspapers, websites, bloggers and television commentators all refer to the VIX®. Formally known as the CBOE Volatility Index, the VIX is a benchmark ...
  4. Mutual Funds & ETFs

    ETFs Vs. Index Funds: Quantifying The Differences

    If you are trying to choose between these two index-tracking investments, compare the costs.
  5. Mutual Funds & ETFs

    The Hidden Differences Between Index Funds

    These funds don't all match index returns. Find out how to avoid costly surprises.
  6. Options & Futures

    Introducing The VIX Options

    Discover a new financial instrument that provides great opportunities for both hedging and speculation.
  7. Mutual Funds & ETFs

    The VIX: Using The "Uncertainty Index" For Profit And Hedging

    Learn the best ways to profit and hedge using the Chicago Board Options Exchange Market Volatility Index.
  8. Personal Finance

    How Stock Market Indexes Changed Investing

    Find out how the first market averages were calculated and what they mean for investors today.
  9. Mutual Funds & ETFs

    Enhanced Index Funds: Can They Deliver Low-Risk Returns?

    These funds may look appealing. Find out whether they can really live up to all of their promises.
  10. Options & Futures

    The Lowdown On Index Funds

    If you can't beat the market, why not join it? Read on to go over your options.

You May Also Like

Hot Definitions
  1. Wash Trading

    The process of buying shares of a company through one broker while selling shares through a different broker. Wash trading ...
  2. Fixed-Income Arbitrage

    An investment strategy that attempts to profit from arbitrage opportunities in interest rate securities. When using a fixed-income ...
  3. Venture-Capital-Backed IPO

    The selling to the public of shares in a company that has previously been funded primarily by private investors. The alternative ...
  4. Merger Arbitrage

    A hedge fund strategy in which the stocks of two merging companies are simultaneously bought and sold to create a riskless ...
  5. Market Failure

    An economic term that encompasses a situation where, in any given market, the quantity of a product demanded by consumers ...
  6. Unsystematic Risk

    Company or industry specific risk that is inherent in each investment. The amount of unsystematic risk can be reduced through ...
Trading Center