With persistent inflation and the aggressive interest rate hikes from the Federal Reserve, the stock market in 2022 experienced its most volatile year since 2009.
The S&P 500 has been on a shaky decline since January 2022, and despite a few short-lived rebounds, it was down 19.4% at the end of 2022. Intraday volatility — the percentage change in share price from market open to market close — averaged 1.84% in 2022, compared to its 40-year average of 1.3%.
Since volatility is often negatively correlated with equities — when equity prices decline, volatility increases — using a volatility index to hedge portfolios with profitable trades based on volatility assumptions is becoming an increasingly popular way for investors to make lemonade out of lemons and turn market swings into profitable trades. To make this kind of volatility trading strategy accessible to more investors, MIAX, a technology-driven leader that builds and operates regulated exchanges, is developing a portfolio of trading products based on the SPIKES® Volatility Index (SPIKE).
What the SPIKES Index does differently and why that matters
MIAX collaborated with T3 Index to create products based on the SPIKES Index. The SPIKES Index is intended to provide an improved measure of equity market volatility and act as an alternative to the Chicago Board Options Exchange’s Volatility Index (VIX). The SPIKES Volatility Index tracks SPY options to measure the expected 30-day volatility in the SPDR S&P 500 Exchange Traded Fund (ETF), the most actively traded ETF in the world.
By tracking SPY options rather than the SPX options, with the latter used by VIX, and by pulling pricing data from all 16 U.S. options exchanges rather than just the Chicago Board Options Exchange (Cboe), SPIKES seeks more accurate, real-time pricing data to use as a basis for its volatility measure. Its proprietary price-dragging technique for capturing live options prices also aims to offer more precise and stable index movements by using the pricing data from actual trades rather than approximating prices based on the midpoint of the bid-ask spread of the options.
These methodology features and the fact that it updates every 100 milliseconds rather than every 15 seconds are among the key reasons MIAX built its ecosystem of volatility trading products around the SPIKES Index.
SPIKES Options and Futures
While investors cannot invest directly in the SPIKES Index, MIAX offers a portfolio of products based on the index that traders can use to trade their volatility assumptions. The SPIKES options and futures offered by MIAX, turn volatility into a tradeable asset class.
Trading in penny increments since October 1, 2022, SPIKES Options and Futures are designed to be more cost-efficient by offering the potential for reduced trading costs, tighter bid/ask spreads and improved execution prices.
Investors feeling anxious about current market conditions can use SPIKES Options (SPIKE) for downside protection by buying call options that could increase in value in the event of a market decline. In futures trading, investors can hedge their positions with SPIKES Futures (SPK): when taking a long position in S&P futures, they can buy long SPIKES Futures to hedge against potential losses since the volatility index is negatively correlated with the market.
Investors, however, are not limited to hedging strategies. SPIKES Futures can also be used to trade term structure. Term structure refers to the relationship between implied volatility and time to expiration in futures contracts. If futures prices are trending up, an upward-sloping term structure suggests that volatility is currently lower than it’s anticipated to be in the future. If futures prices are trending down, a downward-sloping term structure suggests volatility is currently higher than it’s anticipated to be in the future.
For traders, then, a basic term structure strategy is to buy futures during downward slopes (when expected future volatility is lower) and sell (or short) them during upward slopes (when expected future volatility is higher).
SPIKES Volatility ETFs
The latest addition to the SPIKES ecosystem, Convexity Shares 1x SPIKES Futures ETF (SPKX) and Convexity Shares Daily 1.5x SPIKES Futures ETF (SPKY), launched on August 16, 2022.
Intended as an alternative way for traders to hedge or capitalize on volatility, the SPKX and SPKY seek to match the performance of the SPIKE Front 2 Futures Index, which tracks the returns from a daily rolling long position in the SPIKES Futures contracts traded on the Minneapolis Grain Exchange (MGEX™).
This post contains sponsored advertising content. This content is for informational purposes only and is not intended to be investing advice. The information contained in this document is the proprietary information of Miami International Holdings, Inc. (MIH), however its accuracy and completeness is not expressly nor implicitly guaranteed. Past performance is not indicative of future results. The information in this document is provided for information purposes only, and is not intended to provide, and should not be relied on for financial or legal advice. The information herein is presented “as is” and without representations or warranties of any kind. MIH shall not be liable for loss or damage, direct, indirect or consequential, arising from any use of this information. Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options. Copies are available from your broker, by calling 1-888-OPTIONS or from The Options Clearing Corporation at www.theocc.com. No statement within this document should be construed as a recommendation to buy or sell a security or futures contract or to provide investment advice.
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