Trading volume in the VIX (a measure of the implied volatility of S&P 500 index options known as the “fear gauge”) hit record highs over the past two weeks as the government shutdown and debt ceiling debate became the dominant theme in financial markets.
Goldman Sachs analysts Krag Gregory and Jose Gonzalo Rangel point out the surge in a note to clients:
Explosion in VIX activity: VIX futures average daily volume in 2013 is over 38x that of 2008
Although the VIX became a household name in 2008 as the “fear gauge” moved to 81, the average daily volume in the VIX futures market so far in 2013 has been 38x the ADV in 2008, has more than tripled since 2011, and is up 73% yoy. The ADV in the VIX futures market so far has been 165k contracts or 165 million vega per day. The strong liquidity in the VIX futures market has strengthened the VIX options market.
Most active two weeks in VIX options history: From year-end 2007 to year-end 2012 total VIX option volume was up nearly five- fold with a 5y CAGR of 36%. Total volume so far in 2013 is running 9% higher than in 2012 and we still have over two months to go. The last two weeks were the most active 10 trading days in the history of VIX options (Exhibit 7).
The charts below show the rise in average daily trading volume in both VIX options and futures since 2006.