The CBOE Volatility Index – VIX
The volatility index is exactly that… it tells you whether the markets have a high or low volatility.
In reference to the markets, volatility stands for how much or how quick stocks move up and down:
- High volatility: Prices are spiking up and down.
- Low volatility: Prices are more steading.
Depending on what type of trader will determine the optimal volatility level for you:
- If you are an active trader, then you will like a higher volaility because it allows for quicker profits and more opportunities.
- Long-term traders prefer periods of low volatility, which could allow for more constant growth.
The most popular volatility index is the Chicago Board Options Exchange Volatility Index with a ticker symbol of VIX, $VIX, or .VIX. This index measures the volatility of the S&P 500 index options. A high value corresponds to a more volatile market and therefore more costly options, which can be used to defray risk from this volatility by selling options. Often referred to as the fear index, it represents one measure of the market’s expectation of volatility over the next 30 day period.
How VIX correlates with the S&P 500
In the images below you can see how the VIX correlates with the S&P 500 over a given period.
VIX educational videos (Fact or Fiction)
Below are some videos courtesy of Chicago Board Options Exchange (CBOE) about the VIX.
Ben Londergan, Co-CEO, Group One Trading, discusses the CBOE Volatility Index
Fact or Fiction Part 1 of 5
Fact or Fiction Part 2 of 5
Fact or Fiction Part 3 of 5
Fact or Fiction Part 4 of 5
Fact or Fiction Part 5 of 5
Further Reading
CBOE Research Paper,“VIX – Fact & Fiction,” (PDF) The 5 most common misconceptions about VIX.
Image Credit: CBOE Volatility Index Chart