Lesson Overview

What is the VIX?

The VIX is actually just the ticker symbol of the CBOE Volatility Index or "Fear" Index as most investors call it. The VIX measures implied volatility for S&P 500 options. It is quoted in percentage points and translates very roughly into the expected move or change in the S&P 500 over the next one year. If the VIX is currently at 15 then we could expect a 15% move in the S&P 500 up or down over the next year or approximately 1.25% every month between now and then. The VIX is also one of the main ways that we can tell if option pricing is rich or cheap because of the high or low implied volatility which directly affects how an option is priced.

Show Video Transcript +

In this video, we're going to talk about the volatility index, or more commonly referred to as the VIX. The V I X. What a is the VIX, or the volatility index? Well the VIX is simply just the ticker symbol for the Chicago Board of Options Exchange Market Volatility Index.

What it does is it measures the implied volatility of S&P 500 index options. That's it in a nut shell. You may hear it referred to as the fear index or the fear gauge, but all it's simply doing is measuring implied volatility.

Here's just a comparison chart of the VIX and S&P 500 index so you can see how they relate to one another. Generally speaking, the more volatile the market is, the higher the VIX.

That's the gist of understanding the VIX at this point. You can see that as the market starts to become more volatile and more erratic, particularly near 2000 for the S&P, then the VIX started to increase in price near 30.

More notably, during the last market crash, where the market came down off the highs on the S&P, you can see that the VIX was nearing the 80 dollar mark on daily bases. You can see that the more volatile the stocks are becoming, the more volatile options are, the higher the VIX price is.

It's calmed down since than, but we've had some different pricing recently and again more spikes in volatility of late. The volatility index, getting into some more rough details about it.

The VIX is quoted, actually, as a percentage point and translates very roughly into the expected change in the S&P 500 index over the next 30 day period. Which is then annualized. Again, I know that's a lot to take in so let's use an example.

If the VIX is traded right now at a price of 15, this represents an expected return of 15%. Again, that's annualized. That equates to a 1.25% change, on average, up or down. Just a 1.25% swing in the market over the next 30 day period. You can see that it's actually a pretty low reading on the VIX.

A VIX of about 15, meaning about 1.25% over a 30 day period. That is not a big change in the market. We've actually had those types of trades recently, at the time of this video. We've had moves of 2-3% on a daily bases. So VIX at 15, that would be a very, very low VIX, or a low volatility environment.

Some important notes about the VIX. The VIX pricing is calculated using near-term and next-term options for the S&P 500. This is the first and second month of expiration. When there's less than ten days to go in a month.

For example, when there's less than ten days to go in this expiration period, then the VIX calculation rolls, or jumps, to the next set of contract months. What it's doesn't want to happen is that we don't want to count those ten days where pricing becomes a little bit eradicate.

In some cases, actually, pricing drys up, so the pricing of the options is not really realistic to what the market expectation is. That's why the VIX rolls to the next set of contract months. That's important to understand is that the VIX is always moving into always looking at the next two months out really.

When you see steady up-trends, you're going to definitely see low levels of volatility because markets are generally just trending and rising. When the markets are falling, you see panic, which causes high level of volatility. Means that option traders are buying more protection.

A put call ratio is actually a really good indicator to help use. We cover this in other videos as well. As you start to see the market falling, more panic investors, option buyers start coming in and buying up puts to protect their portfolios, which increases implied volatility levels across the board.

For more information on the VIX, I encourage you guys to check out the cboe.com. They are the leader and founder of the VIX index. They have great information on S&P 500 index options on the VIX.

Great tutorials and I encourage you guys to go over there and get more information straight from the source. As always, I hope you guys enjoyed this video. Please share the video, right below here, with any of your friends, family or colleagues on your favorite social network.

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