Single Stock “VIX” Levels: Comparing Two Sets Of Data

Bill Luby noted that the Chicago Board Options Exchange (CBOE) will be publishing “VIX index values” for these five individual stocks.

• Amazon (AMZN)
• Apple (AAPL)
• Google (GOOG)
• Goldman Sachs (GS)
• IBM (IBM)

According to the CBOE, these single-stock “VIX-like” indices will measure implied volatility for options on these stocks in a similar way that the regular VIX does for S&P 500 index options.

The VIX, of course, represents a theoretical implied volatility for at-the-money S&P 500 index options that expires in one month.

It’s a hypothetical value because the index rarely sits at an exact strike price with the option at that strike expiring in exactly one month. So the CBOE uses a specific methodology (PDF) for weighing time to expiration and distance from strike price when calculating the VIX.

(Just as an aside, I find it interesting that while many options calculations use days until expiration as variable for time, the CBOE uses minutes until expiration for a more precise measurement).

Comparing single stock “VIXen” values

If the regular VIX signifies rising and falling premiums of index option values, these new single-stock “VIXens” should represent a similar view for the options on specific stocks.

Data like this has always been available to options traders. In fact, a commenter on Bill’s post asks, “Are these data any different or better than the calculations and charts available at IVolatility.com?”

Ivolatility.com uses a proprietary weighting technique to create its own 30-day implied volatility index for most stocks. How does this data compare? Let’s take a look.

I’m a bit disappointed that the CBOE has only calculated its single-stock VIX-like indices going back about 7 months, but here’s a comparison of both indexes for all five stocks:

Both types of indexes appear highly correlated, but it seems as if you can expect the CBOE values to be higher than the data provided by ivolatility.com. That’s probably because the weighing methodologies differ. When you create an index like this, you have to decide how much weight to give to each strike and when to roll your index forward as an option series nears expiration.

Will these new single-stock VIX indices be useful? I’m not so sure. The VIX itself is often interpreted as a “fear” or “panic” index, but I don’t think you can interpret the implied volatility on one stock in quite the same way.

The S&P 500 index does not release its earnings each quarter, but individual companies do. So you’ll often see 30-day implied volatility for a single stock (especially those in this group of five) rise as an earnings announcement gets closer and closer. Once the news is out, the implied volatility often plunges, whether the news is good or bad.

If you’re going to use these single-stock VIX indices as a guide to how options are priced, it’s probably a good idea to see how implied volatility for these stocks measures up against the VIX itself. And that’s the subject for my next post.

Important Note

While implied volatility represents the consensus of the marketplace as to the future level of stock price volatility or probability of reaching a specific price point there is no guarantee that this forecast will be correct.

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.