Back in 2013 or so when I worked in product development at the International Securities Exchange (ISE), which was the brainchild of E-Trade founder Bill Porter and 1st electronic options exchange, my group had a meeting with this guy who had an idea about creating a new and improved equity volatility measure. The big shift was that he wanted to: make it easier to understand and calculate, and provide a more accurate representation of equity volatility. I'll get back to the second one in a little bit.
The guy was Simon Ho and he had just launched a new company, T3 Index. We were intrigued and while Simon and the group kept in touch over the years it wasn't until 2019 that he and some ISE alumni who had migrated to another options exchange MIAX (Miami International Securities Exchange) launched the SPIKES Volatility Index which paved the way for listing options and ultimately, futures tracking this new volatility measure. Fast forward a few years and the market now has two volatility-focused ETFs from new issuer Convexity Shares.
VIX vs. SPIKES
Before I get into the funds, I want to do a quick review of VIX and compare it to SPIKES, because there are some differences, and they are meaningful. Everybody is familiar with the Cboe Volatility Index, known as VIX, or "the fear index". For years it has been the default representation of equity volatility for US markets. However, if you talk with volatility traders many of them will tell you that VIX has its issues but until something better comes along, they're kind of stuck using it.
Very quickly, and at a high level, VIX is based on price movements of option contracts based on the S&P 500 Index (SPX). What is important here is that - assuming I'm reading the index methodology correctly - this index takes in a whole range of options and creates a theoretical "average" contract for both the front (nearest) and second (next calendar) month using "midpoint" pricing as opposed to contract last sale prices.
Once these theoretical representations are established, they are weighted on a daily basis to represent a 30-day forward view of equity volatility. If you feel like getting lost in some weeds, here is a link to the VIX methodology
The SPIKES Volatility Index is similar in that it too represents a 30-day forward view of equity volatility but as mentioned earlier, there are some material differences.
The first is that SPIKES values are based on price movements of options on the SPDR S&P 500 ETF Trust (SPY) . It can be argued, successfully from my perspective, that options on SPY are more liquid than options on the underlying index SPX for two reasons:
- SPX options trade only at Cboe while SPY options are traded at Cboe and any of the other 17 or so options exchanges nationwide. This speaks to better opportunities for price discovery.
- Tying into this is that share prices for SPY are roughly 1/10 SPX index levels. This translates into many more SPY options contracts trading daily than SPX contracts, thus providing more opportunities for price discovery on top of the expanded availability.
Another thing to factor in is that as the SPX options franchise is a monopoly it enjoys monopolistic pricing, especially around data items like settlement prices, while SPY options are a truer example of "free markets" in action.
The other big difference between these measures gets back to my second point. Unlike VIX, SPIKES uses prices from actual trades so anyone trying to replicate the index will see a result that will be closer to the index value. While SPIKES also captures a group of contracts around an At-The-Money (ATM) strike price for each month, it sets the price cutoff at $0.05 or $0.04 depending on the month instead of the zero-bid (or ask) threshold for VIX.
This goes a long way toward reducing the impact of some Out-Of-The-Money (OTM) contract trades having a potentially meaningful impact on the index level. There are some other subtleties between the two but again, for a more in-depth look, here is a link to the SPIKES methodology guide. One other difference between the two indexes is that VIX is calculated and disseminated every 15 seconds while SPIKES updates every 100 milliseconds.
The funds that have launched are the 1x SPIKES Futures ETF (SPKX) and the strong ticker game Daily 1.5x SPIKES Futures ETF (SPKY) . The "Daily" in the name of SPKY refers to the daily mark to market and reset of the swap that provides the leverage for this fund.
I've written about the potential compounding effect of daily reset products before and the fund prospectus has some good tables outlining various scenarios that are worth reviewing. The funds track the SPIKE Front 2 Futures Index which is a fairly generic index except for the fact it is calculated using SPIKES futures contracts.
My take on these funds is that volatility is a trader's game so if you want to "express your opinion" on volatility feel free to do so but follow some of the links in this article first to better understand what you're getting yourself into. In other words, if you feel that volatility is an asset class that has a place in your strategy then these funds just may be worth a closer look.