More on VIX
March 14th, 2008 by Grant in: Market TrendsIn a post a couple days ago, I brought up the notion that the Chicago Board Options Exchange volatility index (VIX: chart) could be a good indicator of when the bottom of the stock market decline will be found.
VIX is the ticker symbol for the Chicago Board Options Exchange Volatility Index, a popular measure of the implied volatility of S&P 500 index options. Referred to by some as the fear index, it represents one measure of the market’s expectation of volatility over the next 30 day period.
The VIX is quoted in terms of percentage points and translates, roughly, to the expected movement in the S&P 500 index over the next 30-day period, on an annualized basis. For example, if the VIX is at 15, this represents an expected annual change of 15%; thus one can infer that the index option markets expect the S&P 500 to move up or down roughly 4.33% (15% divided by the square-root of 12 months) over the next 30-day period. That is, if, for example, the S&P 500 is currently at 100, index options are priced with the assumption of a 68% likelihood (one standard deviation) that the 30-day change in the S&P 500 will be within 4.3 points up or down.
Investors believe that a high value of VIX translates into a greater degree of market uncertainty, while a low value of VIX is consistent with greater stability.
Winston’s contention is that when the VIX value increases above 30% we’ll start seeing money coming back into the market. We’re getting close, but I think there is still a strong possibility that the credit and mortgage problems have yet to run their course.
Tags: Chicago Board Options Exchange | market volatility | VIX
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