The CBOE Volatility Index, or VIX, is a real-forex volatiliteetti market index representing the market’s expectations for volatility over the coming 30 days. Investors use the VIX to measure the level of risk, fear, or stress in the market when making investment decisions. Traders can also trade the VIX using a variety of options and exchange-traded products, or use VIX values to price derivatives.
For financial instruments like stocks, volatility is a statistical measure of the degree of variation in their trading price observed over a period of time. On 27 September 2018, shares of Texas Instruments Inc. LLY had much wider range for price swings compared to that of TXN, which is completely different from the earlier observation made over one month. LLY had higher volatility than TXN during the three month period.
Volatility attempts to measure such magnitude of price movements that a financial instrument experiences over a certain period of time. The more dramatic the price swings are in that instrument, the higher the level of volatility, and vice versa. Volatility can be measured using two different methods. First is based on performing statistical calculations on the historical prices over a specific time period. The second method to measure volatility involves inferring its value as implied by option prices. Though none of the methods is perfect as both have their own pros and cons as well as varying underlying assumptions, they both give similar results for volatility calculation that lie in a close range. The above stock-specific example of TXN and LLY can be extended to sector-level or market-level.
Having a standard quantitative measure for volatility makes it easy to compare the possible price moves and the risk associated with different securities, sectors and markets. The VIX Index is the first benchmark index introduced by the CBOE to measure the market’s expectation of future volatility. Only those SPX options are considered whose expiry period lies within 23 days and 37 days. While the formula is mathematically complex, theoretically it works as follows.
P 500 index by aggregating the weighted prices of multiple SPX puts and calls over a wide range of strike prices. Volatility value, investors’ fear and the VIX index values move up when the market is falling. One should also note that VIX movement is much more than that observed in the index. In absolute terms, VIX values greater than 30 are generally linked to a large volatility resulting from increased uncertainty, risk and investors’ fear. VIX values below 20 generally correspond to stable, stress-free periods in the markets. VIX index has paved the way for using volatility as a tradable asset, although through derivative products.
Other than the standard VIX index, CBOE also offers several other variants for measuring broad market volatility. Like all indexes, one cannot buy the VIX directly. The offers that appear in this table are from partnerships from which Investopedia receives compensation. A measure of option cost and implied volatility.
30-day volatility for the Nasdaq-100 index, as implied by the price of options on this index. Volatility Index is an indicator of the short-term expectation of volatility in the stock market. A VIX option is a derivative security based on the CBOE Volatility Index as its underlying asset. The estimated volatility of a security’s price derived from an options pricing model. What is the CBOE Volatility Index? Investopedia is part of the Dotdash publishing family.