Single Stock VIXs?

Bill Lubyfrom the Vix and More blog stumbled across what I think can be very useful if it catches on. The Chicago Board Option Exchange will start calculating a VIX-like index for five individual stocks. Specifically a "VIX" will be calculated for Amazon (AMZN), Apple (AAPL), Google (GOOG), Goldman Sachs (GS) and IBM (IBM).

From Bill's post and the CBOE announcement it seems that the intent is to provide information for options traders to base decisions upon, or at least to contribute to the decision-making process. I saw nothing to imply that these single stock VIXs will themselves become tradeable instruments.

In the last few months, or longer, we have seen a slew of ETPs tied one way or another to the VIX index. It seems like they are marketed as tools for speculation and tools for hedging. I have no interest in using them as hedges, because unlike an inverse fund it is not a certainty that if the market goes down 2% today that a VIX fund will go up. Likely is not the same as certain. Also, VIX has a lot of moving parts; its relationship to the S&P 500 index ebbs and flows over time. And we haven't even gotten to the various issues with the ETPs.

This does not mean there is no utility here, because there is. Also, with the single stock VIXs (should they proliferate), obviously we are only talking stocks; with active options markets, we could see this spill over to some active ETFs as well.

One example of the utility I can envision is that if there were to be a dramatic change in the VIX-like index for a stock or ETF you own -- without much price change -- you could take that as a warning. This would be evidence of the market thinking something was going on (good or bad) and could serve as a catalyst to spend extra time on a holding to try to figure it out.

For example, the other day Chile announced a program of buying dollars with pesos in an effort to cap price appreciation of the peso. This has hit both the bank we own for some clients and the ETF we own for other clients (the ETF a little more). If VIX-like indexes existed for these two, they might have warned of something coming. For me this is likely going to be more for informational purposes than to trade (I'll take all the information on all of our holdings that I can get), as a spasm like this doesn't invalidate what I believe is a multi-year -- decade-long, even -- investment theme ... but some folks would trade off of such a warning.

This sort of innovation, regardless of whether we see more single stock VIXs and ETF VIXs, is evidence of the evolution of capital markets and investing in capital markets. Products and information, when used correctly, make us more knowledgeable, give us access to more sophisticated portfolios, give the opportunity for better risk adjusted returns and a better chance for having enough money when it is needed.

I've mentioned countless times the number of markets or specialized niches that had normal decades during the oughts. These markets and niches have been investable all along, but the ETFs now make the access much easier. Anyone with exposure to these places and themes probably did just fine during the last decade -- and "just fine," combined with a proper savings rate, can get the job done.