Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
VR and Gaming Becomes the Metaverse - 7th Dec 21
How to Read Your Smart Meter - Economy 7, Day and Night Rate Readings SMETS2 EDF - 7th Dec 21
For Profit or for Loss: 4 Tips for Selling ASX Shares - 7th Dec 21
INTEL Bargain Teck Stocks Trading at 15.5% Discount Sale - 7th Dec 21
US Bonds Yield Curve is not currently an inflationist’s friend - 7th Dec 21
Omicron COVID Variant-Possible Strong Stock Market INDU & TRAN Rally - 7th Dec 21
The New Tech That Could Take Tesla To $2 Trillion - 7th Dec 21
S&P 500 – Is a 5% Correction Enough? - 6th Dec 21
Global Stock Markets It’s Do-Or-Die Time - 6th Dec 21
Hawks Triumph, Doves Lose, Gold Bulls Cry! - 6th Dec 21
How Stock Investors Can Cash in on President Biden’s new Climate Plan - 6th Dec 21
The Lithium Tech That Could Send The EV Boom Into Overdrive - 6th Dec 21
How Stagflation Effects Stocks - 5th Dec 21
Bitcoin FLASH CRASH! Cryptos Blood Bath as Exchanges Run Stops, An Early Christmas Present for Some? - 5th Dec 21
TESCO Pre Omicron Panic Christmas Decorations Festive Shop 2021 - 5th Dec 21
Dow Stock Market Trend Forecast Into Mid 2022 - 4th Dec 21
INVESTING LESSON - Give your Portfolio Some Breathing Space - 4th Dec 21
Don’t Get Yourself Into a Bull Trap With Gold - 4th Dec 21
GOLD HAS LOTS OF POTENTIAL DOWNSIDE - 4th Dec 21
4 Tips To Help You Take Better Care Of Your Personal Finances- 4th Dec 21
What Is A Golden Cross Pattern In Trading? - 4th Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - Part 2 - 3rd Dec 21
Stock Market Major Turning Point Taking Place - 3rd Dec 21
The Masters of the Universe and Gold - 3rd Dec 21
This simple Stock Market mindset shift could help you make millions - 3rd Dec 21
Will the Glasgow Summit (COP26) Affect Energy Prices? - 3rd Dec 21
Peloton 35% CRASH a Lesson of What Happens When One Over Pays for a Loss Making Growth Stock - 1st Dec 21
Stock Market Sentiment Speaks: I Fear For Retirees For The Next 20 Years - 1st Dec 21 t
Will the Anointed Finanical Experts Get It Wrong Again? - 1st Dec 21
Main Differences Between the UK and Canadian Gaming Markets - 1st Dec 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Demystifying the Stock Market VIX Volatility Index

Stock-Markets / Volatility May 16, 2011 - 05:38 AM GMT

By: Jeff_Neal

Stock-Markets

In 1993, the Chicago Board Options Exchange (CBOE) introduced the CBOE Market Volatility Index. The CBOE Market Volatility Index, known by its ticker symbol VIX, measures the volatility of the U.S. equity market. It provides investors with up-to-the-minute market estimates of expected volatility by using real-time OEX index option bid/ask quotes.


The VIX is calculated by averaging S&P 100 Stock Index at-the-money put and call implied volatilities. The availability of the index enables investors to make more informed investment decisions. Going over the VIX history along with the S&P 100 OEX index it is quite evident that all of the spikes in volatility accompanied market downturns and significant events that affected the market.

This history reveals a great deal about the relationship between market and volatility. There is a definite tendency of the VIX to spike upward during periods of market decline. For example, during the major market decline of October 1987 volatility reached very high levels. Volatility then declined steadily until late 1989. The spike in volatility at that time was the result of the sharp one-day market correction in October.

Another sharp increase in volatility occurred in August and September 1990, the period during which Iraq invaded Kuwait. In January 1991, volatility rose sharply again, just before the initiative led by the United States known as Operation Desert Storm. The last peak in volatility displayed in the chart reflected the downturn in the market, occurring one month before the United States presidential election in November 1992.

The tendency of market volatility to expand during market downturns is clear from this historical account. This relationship is the subject of numerous studies of the options market. Perhaps the best way to understand the relationship between volatility and market declines is to look at the options market form a put perspective.

A put is the option market equivalent of an insurance policy. An investor may purchase a put to insure a sale price for the underlying asset. The seller of a put may be viewed as the equivalent of an insurance underwriter. The put writer accepts a premium in return for accepting a risk, which in this case is ownership of the underlying asset. In the insurance business, premiums rise following significant negative events. In the options business, market volatility, the critical factor in determining put premium levels, increases in periods of market distress.

The same factor that leads to an increase in put premium levels, increased volatility, causes call option premiums to increase at the same time. Thus, put premium levels and call premium levels move together because they are both related to volatility. This relationship is critical to the option strategist. High call premiums during periods of market distress are the opposite of what most investors expect.

A similar pattern would be observed if we looked at a chart of the implied volatility of an individual stock. When looking at an implied volatility for a stock, remember that the number can vary from option to option within a family of options. It can also change for in-the-money or out-of-the money types.

For this reason, most data services use a filtering process, or weight more heavily the more liquid at-the-money contracts. The most important consideration is that the service remains consistent in applying its rules. Remember also that as a stock's options become less liquid, the implied volatility becomes a volatile number. This would suggest that decisions based on implied volatility would be better for liquid issues than those less often traded. The bottom line is that the VIX is the central starting point when putting together option strategies.

Happy Trading!

Special Stock Trader Subscriber Deal

Not a subscriber? Sign up here and receive a free copy of my eBook "Stock Trading Secrets From The Pros" - which contains insight from my interviews of over 100 of the industry's top traders. You also get my weekly stock and option trade recommendations and a monthly professional trader insight article.

Best Regards,
Jeff Neal

E-mail : Info@stockbarometer.com if you have any questions about this trade or any other questions or comments.

Important Disclosure
Futures, Options, Mutual Fund, ETF and Equity trading have large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in these markets. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to buy/sell Futures, Options, Mutual Funds or Equities. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this Web site. The past performance of any trading system or methodology is not necessarily indicative of future results.
Performance results are hypothetical. Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not actually been executed, the results may have under- or over-compensated for the impact, if any, of certain market factors, such as a lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown.
Investment Research Group and all individuals affiliated with Investment Research Group assume no responsibilities for your trading and investment results.
Investment Research Group (IRG), as a publisher of a financial newsletter of general and regular circulation, cannot tender individual investment advice. Only a registered broker or investment adviser may advise you individually on the suitability and performance of your portfolio or specific investments.
In making any investment decision, you will rely solely on your own review and examination of the fact and records relating to such investments. Past performance of our recommendations is not an indication of future performance. The publisher shall have no liability of whatever nature in respect of any claims, damages, loss, or expense arising out of or in connection with the reliance by you on the contents of our Web site, any promotion, published material, alert, or update.
For a complete understanding of the risks associated with trading, see our Risk Disclosure.

© 2011 Copyright Jeff Neal - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in