The VIX Index Explained

March 2, 2007 | By | Reply More

We have been asked by a number of our readers to explain the VIX Index after our article on future gold direction as a result of this week’s stock market turmoil so here goes.

The index is the ticker symbol for the Chicago Board of Exchange (CBOE) Volatility Index.

The methodology uses the implied volatilities of the options of a range of the   components of the S&P 500 calculated from both calls and puts on a daily basis.
It is a popular measure of market risk over the following 30 days and is known as the “investor fear gauge” or “fear index”.  If the VIX is greater than 30 then it indicates considerable market volatility as a result of investor uncertainty.

If below 20, as it has been for a long period until this week, then it indicates investor confidence in the market direction.

There are two other volatility indexes, The VXD tracks the Dow (DJIA) and VXN tracks the Nasdaq 100. All three use similar methodology to measure investor confidence.

Bear in mind that the buyers and sellers of options are a taking a view of the future performance of their chosen investment vehicle.

These volatility indexes can easily be accessed on line.

Please note that we are always happy to clarify any facet of our articles on request.

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Read more on Volatility Index (VIX) at Wikinvest

Category: Investment Vehicles

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