There is something that really confuses me. I understand the basics of the VIX, and a higher number equates to higher volatility. However, the VIX was higher this year than the dot-com years. No one will forget the 10 point moves in a variety of nasdaq stocks like yhoo or brcm. But this confuses me to say the volatility was higher this past year than in 99-01. What gives???? Am i reading the number wrong? http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=vix&sid=0&o_symb=vix&freq=2&time=11
I believe that VIX relates to the implied volatilitiy (expected volatility) of the s&p 100 index options. So the volatility of the dot com stocks wasn't effecting the vix. The vix mesures implied volaitliy of the 100 largest stocks, the GE's IBM's Xons Wmts ect. The large caps weren't particularly volatile during the bubble. There is another indicator for the nasdaq 100 index, but i forget the symbol. I believe it was much higher during the bubble than it is now.
Actually, the VIX is a "fear" indicator. During the bubble, there was no fear (or relatively low fear) so the indicator was low. While the VIX measures volatility in both calls and puts, not many folks are buying puts as insurance when everything is rosy (i.e. dot com bubble). But when things are looking bleak, folks will pay a high premium for insurance, hence driving up implied volatility and as a result, option premiums. This is why the VIX will spike. You'll often notice that the VIX moves inverse of the market. These days it seems like if the VIX is around 25-35 things are "normal" ... getting into the 40's and 50's tells me that there's going to be a reversal. Look at the VIX in comparision with the Nasdaq or DJIA.
Check this out: http://www.cboe.com/MktData/vix.asp Look at the historical (back calculated VXN) data and you'll see what 'happened' in 1999 and 2000. Technically this is make believe as the VXN didn't exist back then but was created afterwards using the same info that is input today to calculate it. Hope that helps!
I believe this is correct. The Vix measures fear more than volatility. If volatility is to be measured, then an ATR or something similiar should be used.
A great way to use the VIX is to plot closing VIX versus 10 Day SMA. Allows for a good way to gauge? SP? sentiment over time. This is a pretty good gauge of mkt sentiment: e.g. VIX was (14%) under it's 10 DMA into 11/27-12/02..i.e absence of fear= BEARISH...to wit SP500 down 70+ or so since then! And on the other hand on 12/6, (Unemployment Data:WEAK); VIX was 12% over 10DSMA ; i.e FEAR building and low tick open reversed to close well. Open: SP 892; Close SP 916 or so! This is a good use of 1 data point! David
VIX measures the implied volatility of a basket of OEX options. Implied volatility is derived from the Black-Scholes options pricing formula and is a measure of how expensive the option is. Historical volatility measures how much an option or underlying has actually fluctuated in price. I understand the explanation that VIX reflects fear, but I have never really understood why this is so. Isn't it just as reasonable to think traders would bid up call prices during bull moves? Nevertheless, the indicator does work, provided you know how to use it. The TradingMarkets site has a course on using it and claims its accuracy is in the mid to high 60% range over a few days.