VIX Goes to Canada

There’s some big volatility news this week from our neighbors to the north in the form of a Canadian version of the VIX. On Monday, TMX Group Inc., the owner of the Toronto and Montreal stock exchanges, introduced a Canadian volatility index that it will publish with Standard & Poor’s.

The Canadian VIX, which will be formally known as the S&P/TSX 60 VIX, will use the same methodology the CBOE uses for our version, measuring implied volatility for stocks over the next 30 days, based on the cost of index options traded on the Montreal Exchange.

TSX also said it plans to introduce futures and options on the gauge. Let’s hope for their sake they stop at these products and shy away the ETN route with a Canadian VXX. Or, if they do list one, I hope they at least allow us to short it.

Canada creating its own VIX makes perfect sense. Other countries, from Germany to Taiwan to India, have their own variations. In fact, that was part of the rationale behind adjusting the VIX methodology back in 2004, i.e., the portability.

The VIX has a simple formula that can be applied to literally any underlying product that lists options. We already have a gold VIX and an oil VIX. The next step is likely stock-specific volatility indices. For example, one day we could see an AAPL VIX, a GOOG VIX, an XOM VIX, et. al.

As the awareness of all things volatility expands, remember that as far the index itself is concerned, this is only a revolution in user friendliness. The options themselves on TSX already trade and already carry an implied volatility. All” VIX-ing” them does is makes it easier for the casual observer to click once and see the volatility of the Canadian index. Of course, when we are allowed to trade futures and options on said index, that will be something new.

I have to admit, it took me a few years to warm up to the concept of trading volatility in this fashion. To me, buying simple puts provides much better portfolio protection. It also alleviates the confusion of seeing the actual VIX move one way and the trading vehicle you own moving another. Or, perhaps, not moving as strongly in your favor as you would expect. Not to mention the mind-numbing concept of having to price the volatility of a volatility index. But it’s really just a matter of learning the quirks of what you trade. And if you learn it quickly, perhaps you have a pricing edge over the next guy that walks in and trades something he doesn’t quite understand.

And, hey, Canada was gracious enough to give us hockey and Neil Young, so it’s about time we give something back.

Follow Adam Warner on Twitter @agwarner.

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