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VIX – haudoodeydudat?

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October 21, 2008 – Comments (1)

Up until a few days ago, I had never heard of the Volatility Index, until it hit the headlines. It trades under the symbol VIX on the CBOE. This was one of those things I wish I had never asked about, but now I am fascinated by the answer.

In bull markets, it trades in the teens; for the past year, it has been in the 20’s. A couple of days ago, it hit a new record high: 80’s. So, it goes the opposite direction of equities. Today, I think, it is in the 50’s. From now, I am going to watch it along with other equities I am keeping tabs on.

My big question: how do they calculate it? The CBOE has a webpage and whitepaper devoted to it. I saw the formula: it looks complicated, but the arithmetic is straight-forward and easily programmed into Excel. I got lost when they described how they choose data points: I know nothing about options, so had no clue what they were choosing and why. It uses index options on the S&P 500: apparently, it has something to do with the gaps between strike prices. That led me to whitepapers on volatility swaps, variance swaps, and Black-Shoales-Merton; OK, now I have no idea what I am talking about (I am still not sure what vega is, other than a junky little car made by GM in the 70's that had an aluminum engine). I think I am going to just take it on faith as to what VIX represents.

1 Comments – Post Your Own

#1) On October 21, 2008 at 11:03 PM, Imperial1964 (97.92) wrote:

The VIX doesn't move in the opposite direction of equities.  It is simply a measure of the expected volatility--that is, movement--in both directions.  It just happens that the stock market tends to make more violent moves to the downside.

You can find a description of the VIX on investopedia.  Since you don't know much about options you may have to look up several terms used in the definition, too.

Basically, the VIX is low when things are calm and high when the market expected to move.  Probably its best use is to measure the amount of "fear" in a bear market.  It's also very useful to option traders and you can kind-of think of it as the S&P 500 of options.

Yeah, Chevy Vegas were junk.

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