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What is the VIX - Why it's useful
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Last update : September 2010
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The VIX is the Chicago Options Exchange Volatility Index and its ticker symbol is unsurprisingly VIX.
So what is it?
It's the price of implied volatility of the S&P 500 options. And as option volatility is a critical piece of information when looking to trade options the VIX is a good tool to use to get an idea of where it's currently trading.
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The VIX's measurement is in percent. So if it's currently trading at 43 that equates to an implied volatility rate of the S&P 500 options of 43%. Many market operators use it to quickly gauge where current volatility is and where it's been, and therefore if the current rate is historically high or low.
Look at the weekly VIX chart below.
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Weekly VIX : July 2007 - April 2008
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- From August 2007 to September 2008 the VIX traded in a range of between 15% and 35%
- It then exploded to nearly 90% when the stockmarket got beaten up in the final quarter of 2008
- Volatility then dropped to just under 34% in April 2009
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| So looking at the chart right now, what volatility quick conclusions can we come to? |
- Volatility is still expensive, if you use the last 18 months as a guide
- But it has contracted since it's peak at 90% around the October 2008
- So buying options due to the high volatility is still going to be a tough trade to make money on
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| Summary - Use the VIX to get a quick reading of where the option volatility is for the overall market. Unfortunately there is no such index for the FTSE 100 nevertheless the VIX can help. As the western stockmarkets are highly correlated if option volatility is high or low in the US you can bet the London market has been following a similar trend. |
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