Volatility Index (VIX) – Tuesday’s Term Of The Week
I see so many financial e-letters in my inbox every morning, that I usually just pick out the two or three that capture my attention the most. The rest go into tidy respective folders that I can go into should I ever have a hankering for opinions on outdated material.
So after honing in on certain key words every day, it wasn’t any surprise when I took a second glance at The Growth Stock Wire’s melodramatic headline: “Another Ominous Sign For Stock Prices.”
Now I call it melodramatic mainly because it is - I dare you to think of the word ominous without conjuring images of Dracula and the sounds of organ music in your head - but it obviously worked well enough since I opened it up and read it.
Writer Jeff Clark begins the article with the catchy line: “The Volatility Index is pointing to another 1,000-point move,” and then moves on to the following explanation:
The Volatility Index (aka the “VIX”) is best used as a fear barometer. A rising VIX shows increasing fear among investors. It’s commonly associated with declining stock prices. A falling VIX, on the other hand, indicates investors are less fearful and more willing to take risks. It often leads to rising stock prices.
Now while the rest of the article was highly informative, and I would recommend that you check it out, it was that first section that really caught my attention. I’ve read about the Volatility Index so many times that I usually take it for granted. But what I realized this time around was that I didn’t understand the ins and outs, such as how it’s calculated.
Assuming that I’m not the only one who wants to know a bit more about the VIX, especially during a time when it could be our best indicator and a salvation of sorts for our already much-abused portfolios, I thought we could get a little more familiar with the index.
So just like last week, when we covered shorting stocks between Tuesday’s Term of the Week and Wednesday’s How To, this week, we’ll get a more in-depth definition of the Volatility Index and then tomorrow, we’ll dig a little further.
And where best to turn to than Investopedia.com?
Tuesday, June 23, 2009 - by Jeannette Di Louie, Assistant Editor, Mt. Vernon Research
Getting A VIX On Market Direction
By John Summa, CTA, PhD, Founder of http://www.optionsnerd.com/ and http://www.tradingagainstthecrowd.com/
A Google search on VIX yields some unexpected pages: the name of a Czech rock band, a swimwear catalog and the Vienna Internet Exchange. Interesting stuff, but not quite what we had in mind. [Instead, we're looking for] the CBOE’s VIX, an increasingly popular market-timing indicator, one that is grabbing center stage. Let’s take a look at how VIX is constructed and how investors can use it to evaluate U.S. equity markets.
What Is The VIX?
VIX is the symbol for the Chicago Board of Options Exchange’s volatility index. It is a measure of the level of implied volatility - not historical or statistical volatility - of a wide range of options based on the S&P 500. This indicator is known as the “investor fear gauge” because it reflects investors’ best prediction 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.
Implied volatility is the expected volatility of the underlying, in this case, a wide range of options on the S&P 500 Index. It represents the level of price volatility implied by the option markets, not the actual or historical volatility of the index itself. If implied volatility is high, the premium on options will be high and vice versa. Generally speaking, rising option premiums (if we assume all other variables remain constant) reflect rising expectation of future volatility of the underlying stock indeed, which represents higher implied volatility levels…
How One Company's Groundbreaking "Cancer Blaster" Could Make You Rich
While the World Health Organization predicts 12 million people will develop cancer in 2009, this little-known company is fighting the surge with its amazing cancer-killing device...
Although most people know nothing about it, this "Cancer Blaster" has already saved thousands of people around the world... Like Ohio resident, Caroline Brubaker, who says "with just three, pain-free outpatient visits, I had my life back" or Richard Swanson of Arizona who ended up cancer-free after just 4 hours of treatment...
The best part is, the company recently discovered an extraordinary breakthrough that could go mainstream in a matter of days... Read the full details to find out how you can get in ahead of the event - and be on your way to booking truly incredible gains.
|
Comments
Due to the amount of comments we receive Smart Profits Report will not be able to respond to all questions. By submitting your comment you agree to adhere to our Comment Policy.
Got something to say?
