VolDex® Implied Volatility Indexes

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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.

 

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RELATED FAQS
  1. How does implied volatility impact the pricing of options?

    Implied volatility is an important aspect of the time value premium of an option. As implied volatility increases, call and ... Read Full Answer >>
  2. What is the relationship between implied volatility and the volatility skew?

    The volatility skew refers to the shape of implied volatilities for options graphed across the range of strike prices for ... Read Full Answer >>
  3. How is implied volatility for options impacted by a bearish market?

    Implied volatility for options increases during a bearish market. A bearish market is considered to have more risk than a ... Read Full Answer >>
  4. How is the price of a derivative determined?

    Many different types of derivatives have different pricing mechanisms. The most common derivative types are futures contracts, ... Read Full Answer >>
  5. What options strategies are best for investing in the industrial sector?

    Two options strategies that are well-suited for investors in the industrial sector are the covered call strategy and the ... Read Full Answer >>
  6. How is implied volatility used in the Black-Scholes formula?

    Implied volatility is derived from the Black-Scholes formula and is an important element for how the value of options are ... Read Full Answer >>

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