What About a VIX for the Financial Sector?

By Richard Bloch

If there are new single-stock VIX indices now, why couldn’t you also have a “sector VIX”?

The CBOE is now using its VIX methodology to provide an index of the one-month implied volatility for five individual stocks. Only one of those stocks [Goldman Sachs (GS)] is in the financial sector, which may be one of the more actively traded sectors. So what about a “VIX” for the XLF, the SPDR Financials ETF that tracks S&P 500 financial stocks?

The CBOE isn’t publishing this data – at least not yet. But I took a look at data available from ivolaltility.com to see what this index might have looked like over the past year.

These charts shows the 30-day mean index implied volatility for options on the XLF compared to the VIX:

The top chart shows the two indices, while the bottom chart shows the relative relationship between the two. For example, the XLF implied volatility index was about 60% higher than the VIX back in March.

One thing to note: The CBOE’s VIX methodology is different than the one used by ivolatility.com. As I showed in charts in that previous post, the CBOE single-stock VIX indices tend to be a bit higher than what ivolatility.com publishes, but the two do seem correlated.

The implied volatility for options on the XLF seems to vary widely compared to the VIX. At least over the past year, there were times when XLF volatility seemed “cheap” compared to the VIX and other times when it seemed more “expensive.” Is this idea tradeable? I’m not sure, but it is an interesting relationship to review at least.

Other sectors?

Could you use data like this for other sectors, for example the Health Care SPDR ETF (XLV), which tracks health stocks?

Perhaps, but I’d be very careful. Accurate implied volatility data requires an active options market. For example, the open interest on XLV options for February and March expirations is only about 82,000 contracts. For the XLF, it’s more like 1.6 million.

I suppose you can “VIX-ify” any security where option prices are readily available, but trading based on that data might not always be practical.

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.