After hitting stratospheric highs last fall, the CBOE Volatility Index (VIX) is now hovering around 30, its lowest level since September 2008. What do lower VIX levels mean for future markets? And for that matter, what’s the VIX really? This post gives you a big-picture overview of this widely-watched index.
If you watch the options financial media out there, you may’ve noticed lots of headlines recently about lower levels in the “VIX”. Often nicknamed the “fear index”, the VIX measures expected future volatility, derived directly from S&P 500 Index (SPX) options prices. Put another way, the VIX reflects the overall market’s opinion of how much stock prices may move in the future.
As the financial crisis heated up last fall, VIX levels shot up like we’ve rarely ever seen. In November and December 2008, however, they flattened out as the markets continued to decline, causing many pundits to speculate that the VIX no longer predicted as accurately as it had in “normal” markets. The latest burst of VIX news revolves around its return to the 30 level, historically still a high value but, during this crisis, a relatively calm one. So was the VIX wrong last November / December? What does it really measure?
The Chicago Board Options Exchange (CBOE) itself tackled these questions with a whitepaper called “VIX: Fact & Fiction” (PDF). This concise document explains the top 5 myths surround the VIX and correcting those naysayers who wonder how good of a market predictor it really is.
Barron’s cautions Don’t Get Euphoric About a Falling VIX. This recent article by Steven M. Sears explains why sub-30 VIX levels should not necessarily be taken alone as a raging bull indicator.
On the flipside, TheStreet.com’s Scott Rothbort just published his list of 10 Reasons to Be Bullish. #1 on that list? Perceived volatility as measured by current versus historical VIX levels.
Digging into the Options Guy blog archives, you might be interested to learn more about the deadly VIX calendar spread – a tempting volatility play that has the potential to really burn you. This post also includes links to lots of good overview reads on the VIX.
What else are YOU reading about the VIX? Share any good articles you’ve read here – or your questions about the VIX. Let’s work together to wrap our minds around this important measure of volatility!
Regards,
Brian Overby
TradeKing's Options Guy
www.tradeking.com
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