logo
Sign in or Register

Already a member?

Sign in

Or sign in with your account on:

Not a member yet?

Register
    

 


Understanding the VIX

By  +Follow October 14, 2013 8:46AM
Share:
Tickers Mentioned:

Traders have long been able to find ways to create mathematical formulas to track certain types of market movement so that they can then place bets on them. Between the hundreds of different indices and ETFs out there, if you have a prediction about just about anything that might happen throughout the global economy, there’s a way to profit (or NOT profit) from your inkling.

And one of the most popular things they’ve ever created was the formula that’s now used for the Chicago Board Options Exchange Market Volatility Index (VIX). It uses options trades as a barometer for how volatile traders expect the market to be over the next month. Since it was introduced in January of 1993, the index has captured the interest of traders and investors alike, with the S&P 500 VIX Short-Term Futures ETN (VXX) coming in as the third most popular ETF, with average volume of almost 45 million shares.

But what does the VIX really mean? It’s known as the “fear index,” and generally believed to reflect panic in the markets. But is that what it’s really supposed to mean?

Calculating Volatility

Given its popularity, it should be important to note what, exactly, the VIX is supposed to track. It’s not a measure of present volatility. Nor is it technically a prediction of future volatility, though one could choose to read it as such. Rather, the VIX is a measure of current market sentiment regarding future volatility. Basically, what are today’s traders doing while they try to predict what’s going to happen over the next 30 days? When traders appear to be anticipating big moves in the market in the next 30-days, it should mean the VIX goes up. If they appear to be betting on smaller market moves, it goes down.

The benchmark that’s used to measure that current market sentiment is options trading. The method was developed by Prof. Menachem Brenner and Prof. Dan Galai in 1986 and then published in the July/August 1989 issue of Financial Analysts Journal. Without going to deep into options, they’re essentially contracts to either buy or sell stock at a certain price at a future date. Basically a way to bet on whether or not a stock will go up or down without actually buying the stock. The VIX tracks what options are being bought and sold, and how big the strike price on those options are. A larger strike price implies that the person buying the option forsees a bigger move in that stock’s price. So, if options are being written with larger strike prices, it probably means the market is anticipating bigger swings over the length of those options.

The Fear Index?

So, it should be noted that the index is not intended to be predictive. It’s measuring the current market sentiment about the next 30 days. Traders seem to believe that the S&P is going to make a big move, but that doesn’t mean that they’re right. In fact the correlation

It should also be noted that the index doesn’t indicate whether the anticipated movement is up or down. A large volume of traders buying call options with high strike prices would indicate they’re predicting a bull market, and it would also push up the VIX.

And this is important, because the perception of the VIX as the “fear index” appears to be inaccurate. It's not an indication that a major sell-off is forthcoming. In fact, it could mean just the opposite. The only thing a high VIX should mean is that people buying options are anticipating a lot of movement in the market over the next month. It doesn't really mean anything else.

Or does it?

A Self-fulfilling Prophecy

Perception can mean everything. And the idea that the VIX is the “fear index” is a powerful one. A sharp rise in the VIX is enough to make some traders sell off equities and shift into a risk-off environment. And, of course, if an increasing VIX results in people selling equities, it means it can result in the equities market falling anyway.

So whether or not traders really understand what the VIX means, the fact that they believe it’s the “fear index” makes it the “fear index” on some level. Which can mean that, despite what the VIX actually measures and should represent, the effect it has on the market ends up being that of a "fear index."

A Volatile Way to Trade

Ironically, what makes the VIX such a popular trading vehicle through its ETF is that it's so volatile. So the index tracking volatility is volatile. Go figure. The volume of shares trading hands on the major VIX ETFs proves that traders are interested in continuing to follow the "fear index."

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer


Liked What You Read? Join Equities.com as a contributor and get eyeballs on your content FOR FREE!

Results for VXX
Stock Hobbit
24 May 15 01:41:04
Looking to follow professional stocks and options #traders? Try here http://t.co/ndv5bWOOj4 $VMW $QCOM $VXX $VIX http://t.co/xjDCpAIrFz
royfberger
24 May 15 00:46:04
Barcelona! Take me back! $XLF $FXI $BAC $KO $EEM $TLT $EWT $COP $QQQ $VXX $XOP http://t.co/JUFJoVvAWo http://t.co/Q8qFuxiWv9
TalkMarkets
23 May 15 23:39:02
Market Direction Notes: May-22-2015 $SPY $QQQ $IWM $VXX $TLT $UUP $FXE $FXY $DBC $GLD $USO $IYR $ITB http://t.co/vOHtbO22U3
Fae Tello
23 May 15 23:28:03
$AAPL Remember this chart from Monday? … $fcx $nem $gGLD $GDX $AMZN $vxx $aig $TBT
James DiPlata
23 May 15 23:16:05
RT @OM_giveaways: Top 5 Stocks of 2015 Free HD Video!!!! $GOOGL $AAPL $TSLA $SSYS $VXX $VIX $SPY $SPX #stocks http://t.co/M2rcBOWo2Z http:/…
binaryoptionsocial
23 May 15 22:52:31
RT bosocial RT bosocial RT OM_giveaways Top 5 Stocks of 2015 Free HD Video!!!! $GOOGL $AAPL $TSLA $SSYS $VXX $VIX … http://t.co/wDYvaxvFtF
binaryoptionsocial
23 May 15 22:36:44
RT bosocial RT OM_giveaways Top 5 Stocks of 2015 Free HD Video!!!! $GOOGL $AAPL $TSLA $SSYS $VXX $VIX $SPY $SPX #s… http://t.co/wDYvaxvFtF
binaryoptionsocial
23 May 15 22:21:02
RT OM_giveaways Top 5 Stocks of 2015 Free HD Video!!!! $GOOGL $AAPL $TSLA $SSYS $VXX $VIX $SPY $SPX #stocks … http://t.co/wDYvaxvFtF
OM_giveaways
23 May 15 22:14:19
Top 5 Stocks of 2015 Free HD Video!!!! $GOOGL $AAPL $TSLA $SSYS $VXX $VIX $SPY $SPX #stocks http://t.co/M2rcBOWo2Z http://t.co/1Q1wNnnqKm
Implied Serenity
23 May 15 21:53:25
RT @Callum_Thomas: 2. The $VIX looks to have made a 'break-down' - similar to what it did this time last year... #coiling $SPY $VXX http://…
Implied Serenity
23 May 15 21:52:17
RT @VixUpdates: Speculators remain short the $VIX source: @hedgopia $VXX $VIXY $XIV $SVXY http://t.co/zfsmavZhcH
Stock Hobbit
23 May 15 21:32:06
Looking to follow professional stocks and options #traders? Try here http://t.co/ndv5bWOOj4 $VMW $QCOM $VXX $VIX http://t.co/AiRGTkdcdw
Bradley
23 May 15 21:09:11
I love this trading girl! $XLF $FXI $BAC $KO $EEM $TLT $EWT $COP $QQQ $VXX $XOP http://t.co/l9JkTCtpHR http://t.co/ARv9JG6rnl
Bits & Pieces 112814
23 May 15 20:38:37
WARRIORSvROCKETS Game 3 is like retail traders vs algos & dark pools or permabears vs the FED. $SPY $DIA $QQQ $IBB $VXX $UVXY
James DiPlata
23 May 15 19:02:47
RT @bosocial: RT bosocial RT bosocial RT OM_giveaways Top 5 Stocks of 2015 Free HD Video!!!! $GOOGL $AAPL $TSLA $SSYS $VXX $VIX … http://t.…
broken euro
23 May 15 18:29:49
RT @ppprophet: David Stockman on the economy: The stockmarket is going to CRASH $SPX $SPY $VIX $TVIX $VXX $QQQ $SQQQ #DAX #CAC40 #SMI #sto…
broken euro
23 May 15 18:29:45
RT @ppprophet: The global economy in a downward spiral http://t.co/tT0MIhmPhI $SPX $SPY $VIX $TVIX $VXX $QQQ $SQQQ #DAX #CAC40 #SMI #stock…
broken euro
23 May 15 18:29:23
RT @_thebigbadwolf_: Investors pulled out $1.8 billion from domestic equity funds, over the week ended Wednesday http://t.co/BPEIiuhs3v $SP…
CoveredCallCorner
23 May 15 18:14:40
Why $VXX is smart to own this time of year http://t.co/60N0mOM4zX
@CRASH_1929
23 May 15 18:06:58
RT @ppprophet: The global economy in a downward spiral http://t.co/tT0MIhmPhI $SPX $SPY $VIX $TVIX $VXX $QQQ $SQQQ #DAX #CAC40 #SMI #stock…
@CRASH_1929
23 May 15 18:06:53
RT @ppprophet: David Stockman on the economy: The stockmarket is going to CRASH $SPX $SPY $VIX $TVIX $VXX $QQQ $SQQQ #DAX #CAC40 #SMI #sto…
binaryoptionsocial
23 May 15 17:56:29
RT bosocial RT bosocial RT OM_giveaways Top 5 Stocks of 2015 Free HD Video!!!! $GOOGL $AAPL $TSLA $SSYS $VXX $VIX … http://t.co/wDYvaxvFtF
binaryoptionsocial
23 May 15 17:40:42
RT bosocial RT OM_giveaways Top 5 Stocks of 2015 Free HD Video!!!! $GOOGL $AAPL $TSLA $SSYS $VXX $VIX $SPY $SPX #s… http://t.co/wDYvaxvFtF
TalkMarkets Recap
23 May 15 17:39:02
Market Direction Notes: May-22-2015 $SPY $QQQ $IWM $VXX $TLT $UUP $FXE $FXY $DBC $GLD $USO $IYR $ITB http://t.co/6ZKQJ15T0y
binaryoptionsocial
23 May 15 17:25:09
RT OM_giveaways Top 5 Stocks of 2015 Free HD Video!!!! $GOOGL $AAPL $TSLA $SSYS $VXX $VIX $SPY $SPX #stocks … http://t.co/wDYvaxvFtF
OM_giveaways
23 May 15 17:21:06
Top 5 Stocks of 2015 Free HD Video!!!! $GOOGL $AAPL $TSLA $SSYS $VXX $VIX $SPY $SPX #stocks http://t.co/M2rcBOWo2Z http://t.co/iRzCV5LMl6
Raffaella DeFilippo
23 May 15 17:19:54
RT @_thebigbadwolf_: Investors pulled out $1.8 billion from domestic equity funds, over the week ended Wednesday http://t.co/BPEIiuhs3v $SP…
Stock Hobbit
23 May 15 16:58:05
Looking to follow professional stocks and options #traders? Try here http://t.co/ndv5bWOOj4 $VMW $QCOM $VXX $VIX http://t.co/MhRpQXLgqi
Robert Simons
23 May 15 16:39:50
RT @Callum_Thomas: 2. The $VIX looks to have made a 'break-down' - similar to what it did this time last year... #coiling $SPY $VXX http://…
Nostradamus
23 May 15 16:22:34
David Stockman on the economy: The stockmarket is going to CRASH $SPX $SPY $VIX $TVIX $VXX $QQQ $SQQQ #DAX #CAC40 #SMI #stockmarket #stocks
Nostradamus
23 May 15 16:19:41
The global economy in a downward spiral http://t.co/tT0MIhmPhI $SPX $SPY $VIX $TVIX $VXX $QQQ $SQQQ #DAX #CAC40 #SMI #stockmarket #stocks
Vix Updates
23 May 15 16:14:27
Speculators remain short the $VIX source: @hedgopia $VXX $VIXY $XIV $SVXY http://t.co/zfsmavZhcH
AMANDA
23 May 15 16:05:19
RT @_thebigbadwolf_: Investors pulled out $1.8 billion from domestic equity funds, over the week ended Wednesday http://t.co/BPEIiuhs3v $SP…
Vix Updates
23 May 15 16:03:40
RT @Callum_Thomas: 2. The $VIX looks to have made a 'break-down' - similar to what it did this time last year... #coiling $SPY $VXX http://…
Where's My Phone
23 May 15 15:08:48
RT @IHPosts: EEM iShares MSCI Emerging Markets Stock Forum http://t.co/Vf0aflku5S $EEM $FEYE $HLF $VXX #EEM #stock #stockmarket
@itradestoxx
23 May 15 14:37:43
RT @_thebigbadwolf_: Investors pulled out $1.8 billion from domestic equity funds, over the week ended Wednesday http://t.co/BPEIiuhs3v $SP…
Callum Thomas
23 May 15 14:36:51
2. The $VIX looks to have made a 'break-down' - similar to what it did this time last year... #coiling $SPY $VXX http://t.co/kX8IvmsyKh
Stock Hobbit
23 May 15 13:35:06
Looking to follow professional stocks and options #traders? Try here http://t.co/ndv5bWOOj4 $VMW $QCOM $VXX $VIX http://t.co/y7oxLHm1nI
OM_giveaways
23 May 15 12:56:06
Top 5 Stocks of 2015 Free HD Video!!!! $GOOGL $AAPL $TSLA $SSYS $VXX $VIX $SPY $SPX #stocks http://t.co/M2rcBOWo2Z http://t.co/8lcGaXwEHc
Stock Dawgzz
23 May 15 12:25:02
$DRNK Has Become One Of The Fastest Moving Penny Stocks In The Past 2 weeks! Big News: http://t.co/vFCVfQa85k $LODE $VXX $RMKR
Stock Rocket
23 May 15 11:53:33
Our Stock Alerts Gained Over 1300% In Less Than 3 Months! See Our New Picks: http://t.co/keLIhbbQwg $LODE $VXX $RMKR
VIXSPX
23 May 15 11:22:27
RT @TheAroraReport: UPDATE ON VOLATILITY ETF VXX $VXX $VIX http://t.co/xByHD1zGEx
Branch 22 Capital
23 May 15 11:11:32
Session 04 will begin on Tuesday, May 26th. We will be focusing on 3x Leveraged ETFs including $DWTI $UWTI $VXX $UPRO and $FAZ
TalkMarkets
23 May 15 11:06:12
Market Direction Notes: May-22-2015 $SPY $QQQ $IWM $VXX $TLT $UUP $FXE $FXY $DBC $GLD $USO $IYR $ITB http://t.co/vOHtbO22U3
Penny Stockington
23 May 15 10:51:50
Our Penny Stock Alerts Gained Over 3300% For Subscribers In 7 Months! See Our New Picks: http://t.co/nLJyVUosJ4 $LODE $VXX $RMKR
Stockaholics
23 May 15 10:49:02
Our Penny Stock Pick On $THCZ Is Up 570.77% For Platinum Members! Big Update: http://t.co/dXhKtfZvCq $LODE $VXX $RMKR
StockenheimerSchmidt
23 May 15 10:42:10
Our Penny Stock Pick On $TLFX Gained 70% in the past week and a half! Big Things coming: http://t.co/uooe3E8vs2 $LODE $VXX $RMKR
AdosenTrading
23 May 15 10:16:17
RT @harmongreg: $SPY Trends and Influencers May 23, 2015 - Dragonfly Capital http://t.co/TjCW5gLGQZ $IWM $QQQ $VXX $FXI $ASHR $GLD $USO $TL…
Stock Dawgzz
23 May 15 09:25:33
$DRNK Has Become One Of The Fastest Moving Penny Stocks In The Past 2 weeks! Big News: http://t.co/vFCVfPSxdM $LODE $VXX $RMKR
Anthony Verdone
23 May 15 09:24:15
RT @harmongreg: $SPY Trends and Influencers May 23, 2015 - Dragonfly Capital http://t.co/TjCW5gLGQZ $IWM $QQQ $VXX $FXI $ASHR $GLD $USO $TL…
				
				
By  +Follow October 14, 2013 8:46AM
Share:

Comments

 

blog comments powered by Disqus

About us

Equities.com is the most advanced interactive online social ecosystem for the financial industry, serving as a resource center and next-generation communication platform that connects self-directed investors with public issuers, market experts, and professional service providers and vendors. Registered members can leverage our exclusive proprietary research tools such as the Small-Cap Stars, which outperformed 90% of all small-cap mutual funds, and robust do-it-yourself E.V.A. research reports. The Equities.com Issuer Dashboard is the ideal tool to communicate and manage investor awareness campaigns to the investment community, as well as to access valuable resources to help your company grow.

Market Data powered by QuoteMedia.
Copyright © QuoteMedia. Data delayed 15 minutes unless otherwise indicated. Terms of Use.

Login or Register

LOG IN