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.
BREAKING DOWN '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.