MASTERING THE MARKETS | VIX
V
volatility but, if used correctly, also serves as a hedging tool to mitigate th
Not only the VIX gives investors and traders the ability to trade market
to trade mark
y but, if used , also ser
to mitigate the risks of sudden market gyrations
et s and
IX, which stands f
IX, which stands for the Chicago Board Options Exchange (or CBOE) Volatilit
CBOE) Volatility Index, is a
d Options Exchange (or ndex, is a
measure that stock and option traders use to gauge the anxiety or the fear level in the market. Simply put, VIX is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index (SPX) option prices. In other words, the VIX Index is a volatility index comprised of options rather than stocks, with the price of each option reflecting the market’s expectation of future volatility. It estimates expected volatility by averaging the weighted prices of SPX puts and calls over a wide range of strike prices. The first VIX, introduced in 1993
measure that stock and option traders
by the CBOE, happened to be a weighted measure of the implied volatility of eight S&P 100 at-the- money options. A decade later in
46
2003, it expanded to use options based on a broader index, the S&P
2003, it expanded t based on a broader i 500, which allows fo view of investors’exp
or a more accurate
view of investors’ expectations on future market volatility. A VIX reading of 20% would mean one can expect a 20% upward or downward movement in S&P 500 over 12 month period. The annual number can be broken down into monthly number.
This indicator is known as the
“investor fear gauge,” because it reflects investors’ best predictions of near-term market volatility, or risk. In general, VIX starts to rise during times of financial stress and lessens as investors become complacent. It is the market’s best prediction of near-term market volatility, notes the Investopedia. VIX values greater than 30 are generally associated with a large amount of volatility as a result of investor fear or uncertainty, while
www.wealth-monitor.com | February 2016
THE FEAR GAUGE
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60