The Chicago Board Options Exchange (CBOE) has begun publishing values for the CBOE VIX Tail Hedge Index (ticker symbol: VXTH(SM)), the latest addition to a suite of CBOE strategy indexes designed to manage equity risk.
VXTH, which tracks the performance of a hypothetical S&P 500 investment portfolio protected against tail risk by using VIX calls, provides investors with a benchmark for VIX-based "tail risk" hedge strategies. Tail risk is the risk of a sudden and steep drop in the S&P index.
"CBOE continues to leverage its research and development expertise to further develop the volatility frontier," says CBOE Chairman and CEO William J Brodsky. "The CBOE VIX Tail Hedge Index was created by our research team in order to help investors control portfolio risk when unusual, high-impact events are on the horizon. The index also can be used by CBOE and/or licensed to others to create tradable products aimed at hedging tail risk."
The number of VIX calls hypothetically purchased each month as part of the CBOE VIX Tail Hedge Index strategy will depend on the level of forward volatility. If forward volatility is very low or very high – outside of the range of 15 to 50 – no VIX calls will be purchased when the VIX options expire and VXTH "rolls" to the next month. Purchasing the optimal number of VIX calls when VXTH rolls can reduce hedging costs and monetize VIX option profits when extreme volatility levels are reached.
VXTH is the second CBOE index created by CBOE in 2011 to help investors specifically cope with tail risk in the U.S. equity market. In February, CBOE began publishing values for the CBOE S&P 500 Skew Index(SM) (ticker symbol: SKEW). While both the Skew Index and VXTH address tail risk, Skew is calculated from the price of S&P 500 out-of-the money put options and measures the cost of extreme negative moves in the U.S. equity market. VXTH is a strategy index that helps to manage portfolio risk using out-of-the-money call options overlaid on a hypothetical S&P500 stock portfolio.
