The Blubber

Just like the widely known Cboe Volatility Index (VIX), the SPIKES Volatility Index (SPIKE) measures the forward-looking volatility of the S&P 500 Index. SPIKE was launched by the Miami International Securities Exchange (MIAX) in April 2018 and starting today will be available on https://unusualwhales.com/flow as an additional tool for understanding market sentiment.

While MIAX is not advertising their index as direct competition to the VIX, a comparison seems the logical next step as both indices basically serve the same purpose.

SPIKE and VIX - Basics

The goal of both indices is to provide a market-wide gauge of sentiment and expectations for the upcoming 30 days. This is achieved by calculating an index based on the pricing of options on the respective underlying (SPX for VIX, SPY for SPIKE). As options are widely accepted and used by market participants to hedge against declines and volatile phases they can be seen as a kind of insurance for portfolios. When IV increases due to increasing demand on this insurance, option premiums (both calls and puts) go up as participants are expecting rougher waters (and vice versa). Hence the nickname ‘fear index’ of the VIX. The biggest strength of SPIKE and VIX is the simplicity they provide as an easy-to-read single value for traders to keep track of those complex developments.

But that simplicity is also its biggest weakness, as it can be misleading if used without any further context. A heightened SPIKE doesn’t predict a decline, it basically just tells us that the market participants are ready for higher uncertainty. This could be due to a single event (like before the release of monthly CPI numbers) or overlaying macro effects (like the war in Ukraine).

On a very basic level the calculation of the indices goes as follows:

1. The option chain of 2 expirations around the 30-dte mark is broken down by strikes and their bid/ask prices.
2. In the money options and outliers are filtered out based on the bid prices and other measures.
3. The remaining options are weighted (mainly by their moneyness) and a single number derived from that calculation

Detailed calculation of the indices would go beyond the scope of this short primer, check out the further reading section at the bottom for more information.

SPIKE vs. VIX – Direct comparison

The key difference in both indices is their base: VIX is based on the implied volatility (IV) of SPX options while SPIKE is based on the IV of SPY options.

SPY (formally known as SPDR S&P 500 ETF) is the world’s most actively traded ETF by notional value per day and mimics SPX with a 1:10 scale.

Just as SPY is not just the SPX but smaller, SPIKE and VIX differ in many aspects below the surface while still producing a very comparable outcome.

The following table highlights the key differences on the technical aspects:

While those differences won’t matter much in the day-to-day use for retail traders, they can have a big impact in certain scenarios.

For now we’ll highlight one recent event, a deeper analysis will follow on the blog later.

The screenshot above showcases a intraday spike in the VIX (green graph) on July 1st which sparked some interest on Twitter and in our discord. SPIKE (blue graph) on the other hand had a much smaller amplitude at that moment. Implied volatility in both underlying tickers (SPX and SPY) didn’t diverge at that moment, so there must be another explanation. It can be found in the different methods for calculating the indices, specifically how the prices of the affected options are compiled.

Below is a screenshot of SPX flow of both option chains used to calculate the VIX around the event. Highlighted in yellow are some absurdly wide bid/ask spreads which caused the VIX calculation (which uses the nbbo quotes without adjusting them) to act out. SPIKE on the other hand smoothes out such effects by using quotes from multiple exchanges and stricter filtering of outliers.

Quick Conclusion

So far SPIKE seems to offer the same use for traders as the traditional VIX with some interesting design choices in the index calculation. Further analysis will show how they affect the predictive qualities and its possible use cases.

Stay tuned for upcoming posts about SPIKE and other volatility related topics.

We hope you find this new feature interesting and helpful! If you’d like to share your thoughts with us or have questions regarding SPIKE, let us know @unusual_whales. and @m3zzee .Hit us up on Discord too!
Check out our other blog posts here. And as always, follow the flow!

Sources and resources for further reading:

• https://www.miaxoptions.com/spikes/overview
• SPIKES Product guide (pdf)
  
• https://www.cboe.com/tradable_products/vix/
• VIX White Paper (pdf)