The Cboe 1-Day Volatility Index (VIX1D) was introduced by the Chicago Board Options Exchange in April 2023. The VIX1D measures the expected volatility of the S&P 500 Index over the current trading day, and has become increasingly popular with 0DTE options traders looking to mearusre intraday market volatility.Â
Understanding VIX1D
The VIX1D is designed to reflect the market's anticipation of volatility within the same trading day by analyzing the prices of SPX Weekly (SPXW) options set to expire on the current day and the following day. This methodology provides a real-time gauge of intraday volatility, distinguishing it from the traditional VIX Index, which forecasts 30-day volatility.
At the beginning of each trading day, VIX1D reflects the expected volatility for that day represented in 0DTE options. As the day progresses, it uses a time weighted value that includes the next day expiration.
Calculating VIX1D
The VIX1D is calculated using the prices of SPX Weekly (SPXW) options that expire on the same day (0DTE) and the following day (1DTE). These options are weighted to provide a snapshot of market expectations for intraday volatility. The methodology considers a wide range of strike prices and employs the same variance swap model used in the VIX calculation. This model translates implied option prices into expected volatility, providing an estimate of how much the S&P 500 Index might move during the current trading day.
VIX reflects expected volatility over the next 30 calendar days. VIX1D measures expected volatility for the current trading day.
VIX is derived from a broader set of SPX options with expiration dates ranging from 23 to 37 days. VIX1D focuses specifically on SPXW options expiring today and tomorrow.
The Rise of 0DTE Options & VIX1D
0DTE options are contracts that expire on the same day they are traded. Their popularity has surged, with Cboe reporting that 48% of SPX options volume is now in 0DTE contracts. citeturn0fetch1 This growth is attributed to traders seeking to capitalize on short-term market movements without the overnight risks associated with longer-term positions.
How to use VIX1D in 0DTE Trading
For traders, the VIX1D serves as a barometer of intraday market volatility, aiding in the formulation of 0DTE strategies. A higher VIX1D indicates increased expected volatility for the trading session and a potential for larger intraday price swings. Conversely, a lower VIX1D suggests a calmer market with smaller anticipated movements.
In high VIX1D environments, 0DTE option premiums are elevated due to increased volatility. Traders may choose to employ options selling strategies such as iron condors and iron butterflies to take advantage of higher premiums, anticipating that the underlying symbol’s actual move will be less than implied.
When VIX1D is low, indicating subdued expected volatility, buying options may be advantageous. Lower premiums reduce the cost of entry, and any unexpected market movement can lead to significant gains. However, low volatility environments can lead to minimal price movements.
0DTE traders may also take an opposite approach: selling neutral option strategies in low VIX1D environments with the anticipation that the market will not move much and stay rangebound, and buying options like long calls and long puts when VIX1D is high in hopes of a large directional move.
Conclusion
The VIX1D is a relatively new and potentially powerful tool for 0DTE option traders. By offering a real-time measure of expected daily volatility, it gives traders the information necessary to make informed decisions, optimize strategies, and manage risks effectively. As with any trading tool, it's crucial to integrate VIX1D analysis within a comprehensive trading plan, considering other market factors and personal risk tolerance.
