What is the VIX?
VIX Overview
The index is more commonly known by its ticker symbol and is often referred to as “the VIX.” It was created by the Chicago Board Options Exchange (CBOE) and is maintained by CBOE Global Markets. It is an important index in the world of trading and investment because it provides a quantifiable measure of market risk and investors’ sentiments.
The CBOE Volatility Index (VIX) is a real-time index that represents the market’s expectations for the relative strength of near-term price changes of the S&P 500 index (SPX). The VIX generates a 30-day forward projection of volatility. Volatility, or how fast prices change, is often seen as a way to gauge market sentiment, and in particular the degree of fear among market participants.
Volatility Index Details
The VIX attempts to measure the magnitude of price movements of the S&P 500 (i.e., its volatility). The more dramatic the price swings are in the index, the higher the level of volatility, and vice versa.
In general, volatility can be measured using two different methods.
The first method is based on historical volatility, using statistical calculations on previous prices over a specific time period.
The second method, which the VIX uses, involves inferring its value as implied by options prices.
Since the possibility of such price moves happening within the given time frame is represented by the volatility factor, various option pricing methods include volatility as an integral input parameter. Since option prices are available in the open market, they can be used to derive the volatility of the underlying security. Such volatility, as implied by or inferred from market prices, is called forward-looking implied volatility.
Conclusion on the VIX
Investors, analysts, and portfolio managers look to the Volatility Index (VIX) as a way to measure market stress before they make decisions. When VIX returns are higher, market participants are more likely to pursue investment strategies with lower risk.
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