How can Cboe enhance its VIX Index to better reflect market volatility during extreme events?

Introduction

To enhance Cboe's VIX Index to better reflect market volatility during extreme events, we need to critically examine its current methodology and identify areas for improvement. The VIX Index, often referred to as the "fear gauge," plays a crucial role in the financial markets by providing a measure of expected future volatility. However, its performance during extreme market conditions has been questioned, suggesting room for enhancement. I'll approach this challenge by analyzing key stakeholders, identifying pain points, and proposing innovative solutions to make the VIX more responsive and accurate during periods of heightened market stress.

Step 1

Clarifying Questions (5 mins)

• Looking at the product context, I'm thinking about the VIX's current calculation methodology. Could you provide more details on how the VIX is currently calculated and what specific aspects of its performance during extreme events have been criticized?

Why it matters: Understanding the current methodology is crucial for identifying potential areas of improvement. Expected answer: The VIX is calculated using S&P 500 index options, focusing on near-term and next-term options with more than 23 days and less than 37 days to expiration. Impact on approach: Would help determine if we need to adjust the calculation method or incorporate additional data sources.

• Considering the user behavior, I'm curious about how different market participants use the VIX Index. Can you share insights on the primary use cases for the VIX and how these might change during extreme market events?

Why it matters: Understanding user needs and behaviors is essential for tailoring improvements. Expected answer: The VIX is used by traders for hedging, by investors as a market sentiment indicator, and by analysts for risk assessment. Impact on approach: Would influence whether we focus on improving specific use cases or aim for a more general enhancement.

• Thinking about external factors, I'm wondering about the competitive landscape. Are there alternative volatility indices or measures that are gaining traction, especially during extreme market events?

Why it matters: Helps assess the urgency of improvements and potential directions for innovation. Expected answer: Some alternatives like the VVIX (volatility of volatility index) or realized volatility measures are gaining attention. Impact on approach: Would guide whether we need to incorporate features from competing indices or develop entirely new methodologies.

• Considering the company alignment, what are Cboe's strategic goals for the VIX Index in the next 3-5 years, particularly in relation to its performance during extreme events?

Why it matters: Ensures our improvements align with long-term company objectives. Expected answer: Cboe aims to maintain the VIX as the global standard for volatility measurement while improving its accuracy and reliability across all market conditions. Impact on approach: Would help prioritize improvements that align with Cboe's long-term vision and market positioning.