Sign in or Register

Already a member?

Sign in

Or sign in with your account on:

Not a member yet?


Understanding the VIX

By  +Follow October 14, 2013 8:46AM
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.

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

Results for VXX
2 Sep 14 00:49:05
VIX Short-Term Futures ETN Ipath (VXX) 28.11 $VXX S&P 2,250 Closer Than You Think - Real Time Insight Kevin Co http://t.co/zKq9n4D5yB
2 Sep 14 00:47:14
VXX 28.11 Stock Charts $VXX Barclays Bank PLC iPath S&P 500 VIX Short-Term Futures ETN (NAR) Last Updated: 09/ http://t.co/K5OopfcM2T
Sasi M Motaparthy
1 Sep 14 21:54:01
Picks with 100% Accuracy $DUST $VXX $GMCR $FSLR $MSFT $CMG $GS
John Michael
1 Sep 14 21:49:32
RT @SeekingAlpha: Market Outlook - Avoid Over-Exuberance As September Begins http://t.co/L5YRTGpHSu $DIA $IWM $VXX $QQQ $SPY
Evener Investment
1 Sep 14 21:48:31
RT @SeekingAlpha: Market Outlook - Avoid Over-Exuberance As September Begins http://t.co/L5YRTGpHSu $DIA $IWM $VXX $QQQ $SPY
Seeking Alpha
1 Sep 14 21:46:02
Market Outlook - Avoid Over-Exuberance As September Begins http://t.co/L5YRTGpHSu $DIA $IWM $VXX $QQQ $SPY
1 Sep 14 21:42:16
Russia, too, can "shock and awe." - Veteran Intelligence Professionals for Sanity (VIPS) $TLT $SPX $ES_F $VIX $VXX
1 Sep 14 20:06:01
Looking for a blow off top of the #stockmarket getting that sideline #capital to commit. $vxx is my hedge and looking for gains #ATP
1 Sep 14 19:47:48
$IWEB closed up 100% today, on more than 290 MILLION shares traded! Huge News: http://t.co/ucQcnpafDY $LODE $VXX $RMKR
1 Sep 14 17:32:29
Kids are back to school everyone is back at work watch for $VXX and $Gold and $Oil to go a bit nutty
Carolyn B Miciano
1 Sep 14 16:09:05
Manage risk in Options properly and profits wil come http://t.co/YoV732YcRG $VIX $VXX $OEX
Edward Gofsky
1 Sep 14 15:43:17
RT @muathe: [VIDEO REPOST] Weekend Market Analysis 08/31/2014 [PUBLIC] $DJIA $IWM $GDX $XLF $EEM $EWJ $VXX $FXI $TZA $GDXJ $VWO http://t.co…
David Sohn
1 Sep 14 15:31:57
Interested in trading volatility? The $VXX offers better exposure to short term volatility than the $VIX http://t.co/PdLql9WMTx $QQQ $SPY
Carolyn B Miciano
1 Sep 14 15:20:06
Free course on active trading techniques http://t.co/yAOTEy8rmJ $VIX $VXX $OEX
James P Worthy
1 Sep 14 14:31:03
$VXX Kinder Morgan Inc (KMI) Soars on Consolidation Announcement http://t.co/qqWmFnu2S9
John Turner
1 Sep 14 14:31:03
$VXX Warnings signs from iPath S&P 500 VIX Short Term Futures TM ETN ... http://t.co/rIAuTfRY0u
Nathan Michaud
1 Sep 14 11:54:48
RT @toddpace: @InvestorsLive's DVD is the #1 #stocktrading DVD hands down: http://t.co/p7MnsDJHRW $AAPL, $TWTR, $FB, $GILD, $GPRO, $SPY, $Q…
Carolyn B Miciano
1 Sep 14 11:09:07
Free course on Probability and Options http://t.co/0sXoJiZylh $VIX $VXX $OEX
1 Sep 14 10:52:41
$FSC Fifth Street Finance Corp (FSC) 9.83 +0.04 (+0.41%) $VXX $DVN $IMG.TO http://t.co/LAE4V6Ecas
1 Sep 14 10:51:04
$LNG Buy? Click here to find out if $LNG is a buy hold or sell. Watching these stocks. $JNJ $VXX $UPZS $GPRO h http://t.co/LDMsv1eyTk
1 Sep 14 10:14:40
RT @AntonioNaVi: This is how I see the fear in the short term (1min chart), studies by @Dallaseconomia $VIX $VXX $UVXY #FTR1 http://t.co/Bp…
Antonio NaVi
1 Sep 14 10:12:27
This is how I see the fear in the short term (1min chart), studies by @Dallaseconomia $VIX $VXX $UVXY #FTR1 http://t.co/Bpv6xBRvLF
Investors Hangout
1 Sep 14 09:19:33
lookn4wins: $VXX Candlesticks $VXX Most recent stock chart http://t.co/qzziJysViI
Investors Hangout
1 Sep 14 09:19:33
lookn4wins: $VXX Candlesticks $VXX Most recent stock chart http://t.co/quuhJUwsmH
Antonio NaVi
1 Sep 14 09:04:42
para esta semana hay varios #ETFs interesantes como $SLV y $VXX para largo, $USO se mantiene y posibles cortos en $DIA y $JNK #FTR1
1 Sep 14 09:02:01
http://t.co/vVojvVrNNL lookn4wins: ZIP CASH TRAIN: $VXX Candlesticks $VXX Most recent stock chart http://t.co/i82D0jbk4v
1 Sep 14 08:59:38
$VXX Candlesticks $VXX Most recent stock chart and technical analysis. $JPM $XLK $EMES $GPRO $FNMA $AEZS http: http://t.co/xn4Mu4byGi
1 Sep 14 08:49:55
http://t.co/Vv1sYDyeQn chartguy89: Stock Charts: SH Stock Chart $SH $XLY $VXX $TNA http://t.co/awxYvmADKx
Investors Hangout
1 Sep 14 08:46:50
jim50: $VXX Volume Date=Aug-29-2014 Open=28.01 http://t.co/yJZh8zMt8w
Investors Hangout
1 Sep 14 08:46:49
jim50: $VXX Volume Date=Aug-29-2014 Open=28.01 http://t.co/6Trdbyzbwa
1 Sep 14 08:45:01
when stock ideas come into my head while working out... I listen to them... $BSFT $VIX $VXX $RNG
Stock Forums
1 Sep 14 08:25:25
$JNK Ask http://t.co/wuFf9I3lT0 Also See: $QTMM $VXX $ERBB $CSCO ~
1 Sep 14 08:20:42
$VXX Volume Date=Aug-29-2014 Open=28.01 High=28.42 Low=27.9 Close=28.11 Volume=23182300 http://t.co/DLm5VRthuN
Stock Forums
1 Sep 14 07:20:05
$INVN Last Price http://t.co/qnkauMKw7W Also See: $BSX $PBR $AEM $VXX ~
Chasing Stars
1 Sep 14 07:17:17
$ITMN E.P.S. http://t.co/kOmq87fnwR Also See: $XIV $INTC $VXX $FSPHX ~
1 Sep 14 06:53:21
$LNG Daily Chart $LNG Most recent stock chart and technical analysis. $VXX $RSP $SLV $AMZN $OIH $GLUU http://s http://t.co/g1cjBxDO1F
1 Sep 14 06:52:52
$SBUX Making Some Noise $TASR $FCX $GDX $FCGD $VXX http://t.co/6x0u0Ae0mH
Carolyn B Miciano
1 Sep 14 06:11:51
Detailed study of Implied Volatility http://t.co/fnTx4zV3wV $VIX $VXX $OEX
Chasing Stars
1 Sep 14 05:21:10
$GORO Ask http://t.co/sWY9Z2gVHm Also See: $PLKD $IWEB $IWEB $VXX ~
1 Sep 14 05:02:07
BOOM! Our last $VIX trade in July was more than 20% get our latest: http://t.co/CqFfXYCNN0 $VIXY $VXX $SPX
Carolyn B Miciano
1 Sep 14 04:48:55
Secrets of the Bond market http://t.co/7C18KlmoXr $VIX $VXX $OEX
Investors Hangout
1 Sep 14 04:35:51
$GDX Message Board Posts http://t.co/KsSbz1rZ8V Also See: $GDXJ $VXX $MU $PEIX ~
Rosner Stocks
1 Sep 14 03:14:35
$F Investor Opinions http://t.co/UGpiNwOyy1 Also See: $VXX $XEG.TO $PEIX $PEIX ~
1 Sep 14 03:08:51
$EWQ Quotes http://t.co/6Geko5xoEh Also See: $EMC $EWP $EWQ $VXX ~
Chasing Stars
1 Sep 14 03:08:18
$EWZ Summary http://t.co/flDv5FLLWA Also See: $QIHU $MRK $VXX $GDX ~
Carolyn B Miciano
1 Sep 14 03:01:48
Know Options ? Go to the next level.. http://t.co/a1QJKJFo1M $VIX $VXX $OEX
1 Sep 14 02:43:47
$EWG 52Wk High http://t.co/MGpKFVoVbe Also See: $EWG $VXX $FITX $CSIQ ~
Investors Hangout
1 Sep 14 02:30:15
$EWG Last Price http://t.co/0rx6ilCsOE Also See: $EXPE $NFLX $PFE $VXX ~
1 Sep 14 02:19:27
$EMC Day High http://t.co/ffyBUDCVYP Also See: $NBR $C $VXX $SH ~
Carolyn B Miciano
1 Sep 14 02:03:04
Risk management for Options trading http://t.co/YoV732YcRG $VIX $VXX $OEX
By  +Follow October 14, 2013 8:46AM



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.