1. What is the Cboe S&P 500 Dispersion Index (DSPX)? The Cboe S&P 500 Dispersion Index, also referred to as the Dispersion Index or DSPX, is an index that seeks to measure the expected dispersion in the S&P 500 over the next 30 calendar days, as calculated from the prices of S&P 500 index options and the prices of single-stock options of selected S&P 500 constituents, using a modified version of the VIX® methodology.
The index level reflects an annualized statistic. For example, an index level of 20 corresponds to an expectation for a standard deviation of 20% among the annualized returns of S&P 500 constituents over the next 30 days.
The index level is calculated every 15 seconds from 9:45 a.m. to 4:00 p.m. New York time during standard equity trading days.
2. What is dispersion? Dispersion is a fundamental measure of risk and opportunity in the stock market. It measures how differently stocks are performing or are expected to perform.
Like volatility and VIX, we may measure dispersion historically or derive an expectation-based measure from the options market. DSPX is an expectation-based measure.
3. What does DSPX measure? The index measures market expectations for dispersion by comparing the prices of S&P 500 constituent stock options and S&P 500 index options with maturities around 30 calendar days.
A complementary measure to market volatility—which measures overall fluctuations in stock averages like the S&P 500—the Dispersion Index measures broad expectations for fluctuations in stocks over and above their participation in market volatility over a short-term horizon.
4. What causes DSPX to rise or decline? The index level rises when single-stock option prices increase relative to index option prices. The index level declines when single-stock and index option prices move closer in price.
The relative cost of stock and index options is driven, theoretically, by the magnitude of expected additional movement in single stocks compared to their index. Accordingly, the level of DSPX is expected to rise and fall together with market expectations for the magnitude of “opportunity” for outperformance via active stock selection among the S&P 500’s constituents.
5. Why was DSPX created? The index was developed in collaboration between Cboe and S&P Dow Jones Indices (S&P DJI), applying the VIX methodology to both single-security and index options in order to create a high frequency indicator. The index may offer:
- A measure of short-term S&P 500 dispersion expectations;
- A benchmark for the evaluation of contracts linked to large-cap U.S. equity dispersion; or
- An indicator of the short-term tracking error that active portfolio managers benchmarked to the S&P 500 may generate through stock selection.
6. What are the inputs to DSPX? The level of the index is determined by the differences in prices of options on selected S&P 500 constituents and the prices of S&P 500 index options, as well as the weights of each constituent in the S&P 500 and representative interest rates for the period to maturity of all options included in the calculation.
