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The VIX opening process and its impact

If you're anything like me, you watch the VIX as it can send us helpful information about other participant's views of the market.

If you aren't familiar with the VIX, though, the CBOE Volatility Index is a widely recognized measure of the market's expectation of 30-day forward-looking volatility (also called implied volatility), derived from S&P 500 index option prices.

The opening auction process for VIX options and futures contracts is crucial for establishing a potentially more orderly market, reducing price gaps, and increasing liquidity at the open. It doesn't get talked about much, so I wanted to dig into it and share how it works. We can see it often leaves a footprint in the chart that is referred to as a gap.

The morning VIX gap isn't a bug, it's a feature

Participating in the Opening Auction

To participate in the opening auction, quotes and orders (including customer and professional) are eligible to rest in the order book. Orders with any valid capacity may take part in the Volatility Opening Process. Although not mandatory, orders can include an "On-Open" contingency, such as Limit-On-Open, Market-On-Open, or Settlement Liquidity Opening Order (SLOO).

Settlement Liquidity Opening Orders (SLOOs)

A Settlement Liquidity Opening Order (SLOO) is a special type of order designed specifically for the opening auction process. SLOOs help enhance liquidity and facilitate the price discovery process during the auction. It's also a funny acronym. SLOOs are particularly useful on Volatility Derivatives Expiration days when market participants need to adjust their positions in response to market movements.

Order and Quote Management on Expiration Days

On Volatility Derivatives Expiration days, orders and quotes can be placed, modified, or canceled during the pre-open state. This process enables market participants to manage their positions effectively and respond to market developments rapidly.

Information Dissemination Prior to the Auction

CBOE Options ensures transparency leading up to the opening auction, including on expiration days for Volatility Derivatives. Starting at around 8:30 am ET, Expected Opening Information (EOI) messages are disseminated during the pre-open state for Constituent Series.

EOI messages are updated approximately every five seconds and published on CBOE Options' website, as well as the CFE Futures website. Additionally, these messages are disseminated as Auction Update messages on PITCH, TOP, Opening Process, and Auction data feeds. This transparency enables market participants to access real-time information about the opening auction process and adjust their trading strategies accordingly.

In closing

The CBOE VIX opening auction process plays an important role in establishing a potentially orderly market for VIX options and futures contracts. It also accounts for some of the gaps we see in VIX charts in the morning.

I hope this article helps everyone understand more about how the VIX is priced every morning. If you have any questions please let me know!


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