'CBOE Volatility Index (VIX)' is explained in detail and with examples in the Trading edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.
The CBOE Volatility Index (VIX) refers to the VIX ticker symbol on the CBOE Chicago Board Options Exchange. This is the famed volatility index that displays the expectations of the market for future volatility in the markets over the coming 30 days. This number comes from utilizing the implied volatilities from a huge selection of the index options on the S&P 500. The volatility measurement is intended to be looking forward, comes from the results of volatilities on both puts and calls, and has become the most popular measure for assessing market risk. This is why investors often refer to it as the gold standard of “investor fear gauge.”
This crucial measurement of market participants’ expectations for shorter-term volatility is revealed by the stock index options prices set for the S&P 500. It was unveiled back in 1993 and has since grown into the leading bell weather for market volatility and investors’ sentiment in the globe. Since a number of larger and important investors wanted to have tradable instruments based on the market expectation for future volatility, VX based futures arose in 2004. In 2006, the exchange introduced the VIX options.
Originally, the Chicago Board of Options Exchange created the CBOE Volatility Index (VIX) to develop a range of volatility based products. After the CBOE led the way in innovation, a few other measures of volatility indices were also created. The VXN tracks volatility on the NASDAQ 100 while the VXD tracks volatility on the DJIA Dow Jones Industrial Average.
Yet it is the CBOE Volatility Index (VIX) that remains the original attempt at developing and instituting a form of volatility index. Originally this was intended as a weighted measure for the implied volatility for eight S&P 100 calls and puts with strike prices that were then at the money. After ten years of wild success in 2004, the options expanded to a broader index the S&P 500 that permits a more representative portrayal of the expectations of investors for future market volatility.
When the CBOE Volatility Index (VIX) values rise to over 30, then huge amounts of volatility are on display because of the uncertainty and fear of investors. Values under 20 reveal a complacent and less stressed epoch in the stock markets. For much of 2017, these levels at been at record lows below 12.
Computers actually figure up the VIX as they compile the S&P 500 index. It is different in that it is not based upon underlying stock prices. Rather it relies on the options prices from the S&P 500 to estimate the volatility levels of such options and how they will change from that date to the expiration date of the underlying options. The CBOE then compiles the prices of multiple options to derive their number of aggregate volatility that the index actually tracks.
Thanks to the options based upon the VIX, investors are able to trade them. The CBOE also offers another 24 volatility based ETP exchange traded products that bring the VIX indices up to a total 25.
Actual movements in the CBOE Volatility Index (VIX) mostly come down to the market reactions. Consider an example to better grasp this somewhat challenging concept. On June 13th of 2016, the VIX itself roared higher by over 23 percent. It reached a daily high of 20.97, its best level in more than three months. This spike occurred as a result of a worldwide U.S. equities hard sell off.
Global investors feared the uncertainty in the markets and opted to cash out of all gains and to realize some losses. This led to a greater supply of equities. According to the well-proven law of greater supply and decreasing demand, this led to higher market volatility and a greater VIX number as a direct result.