CBOE's Volatility Index (VIX)
by Wayne A. Thorp, CFA
Over the last couple of years, a great deal of attention has been paid to the Chicago Board Options Exchange CBOE Volatility Index, or VIX for short. Wayne A. Thorp, CFA, editor of Computerized Investing, explains what this indicator is and how to use it. Subscribers to CI have access to a regular column called Technically Speaking that explains chart types, trendlines, and indicators such as the VIX. You can follow Wayne on Twitter @CI_Editor.
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What the VIX Measures
The VIX is a measure of the implied or expected volatility of S&P 500 options over the next 30 days. Implied volatility is the market’s estimated future volatility and is reflected in the premiums paid for options.
Originally launched in 1993, the VIX underwent a change in calculation in September 2003. The “original” VIX was calculated using at-the-money put and call options on the S&P 100 index OEX. Furthermore, the original VIX was based on prices of only eight at-the-money OEX puts and calls, the most actively traded index options at the time.
By 2003, the S&P 500 index SPX option market was the most actively traded option market, while trading volume in OEX index options had fallen off significantly. Also, portfolio managers were using options more as a means of insuring their portfolios, specifically with out-of-the-money and at-the-money index puts. Therefore, the new VIX calculation includes put and call options with a wide range of strike prices, including those in-the-money, at-the-money and out-of-the-money.
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Discussion
Howdy:I suggest reading the book by S.Johnson & J.Kwak. I've lost 5% from my IRA since April of 2010. I am moving to CD's to reduce some of the loss. Over and out!
posted over 2 years ago by Maurice from Massachusetts
What do you think of buying VXX as a non-correlated hedge when the VIX is at unusual lows?
posted over 2 years ago by Lee Wenzel from Minnesota
Good article, but forgone conclusion. Never rely on any one indicator. AAII has repeated that over the years.
posted over 2 years ago by Jerome from Texas
Everyone's always tring to determine when to buy and when to sell. I've been stopped out, ridden the elevator up & down, sold too soon or too late, and occasionally hit the ball "on the screws."
It seems like the two best pieces of advice I've heard is that "It's hard to lose money taking a profit," and "Pigs get fat & hogs get butchered!"
That said, I'm always open to new advice and information!
posted over 2 years ago by Mercere from Tennessee
