You can interprete the VIX and the VXN (pronounced "vixen") anyway you want but it is just an implied volatility. They are derived from market prices of near month at the money calls and puts for OEX and NDX options that are traded at the CBOE. They are calculated and published every 15 seconds by the CBOE.
The VIX spikes up on down days as opposed to spiking up on up days because of the volatility skew inherent in the OEX index options...The skew to the put side means that the implied volatility increases the further OTM you go on the put side, whereas the implied volatility decreases the further OTM you go on the call side...So the VIX is not really a pure volatility indicator, but rather an indication of how the volatility of the options its based on are actually trading... One thing to watch for...When you see the VIX rising as the market itself is rising...That is typically a very good divergence that precedes intermediate -longer term tops in the SPX, OEX...We had that recently happen with the VIX on 11/27 when the market rallied strongly all day, yet the VIX did not confirm this and actually climbed higher the entire day...
The VIX is a measure of "implied" volatility, not actual volatility. The reason it's sometimes called a fear index is because implied volatility essentially indicates how much of a premium (over intrinsic value) people are willing to pay to buy options. As a general rule, other things being reasonably static, implied volatility climbs when people are bidding up put options. Buying puts generally means the buyers are fearful that prices will fall. So the more of a premium they're willing to pay to buy those options, the more fearful they are. In that way, it's typically considered an inverse indicator near market tops and bottoms (i.e., especially high VIX readings typically occur near a market low and especially low VIX reads typically occur near a market high). Although it's not necessarily any particular absolute values - generally you have to put VIX reads in context, e.g., during a selloff how does the current VIX level compare to what it was the last time the S&P was at the same level or how the current VIX is extended from or behaves relative to a moving average of itself.
I fully understand what VIX is, but sometimes the moves confuse me - Like today. Why is it up around 10%, volume not great, move in stocks hardly front or even near the front page. Why does it move around crazy like this? And also I asked a question on odd lots in the stockmarket yesterday, can anyone help me understand them a bit better? As I understand an odd lot is less than 100 shares, but then is 250 shares an odd lot in that it's 200 and 50. Is it therefore possible to be bidding for 250 shares and only get 200 of them, even if the price goes through your bid. Thanks
A round lot is any block of stock traded that is evenly divisible by 100. A block of 50 or 250 shares would be an odd lot. Hope this helps.
Maybe this is because people perceive that stocks fall faster than they rise. The aforementioned reason, is why the vix rises in a falling market, and falls in a rising one. Certainly, Calls may be bid up during a bull move, but less so than when compared to Puts in a bear market. So, yes, I agree with your point, however, I would say in practice what "should" happen is not what actually happens.
CB, as an option seller I watch the vix pretty closely. 5-10% moves are faily common when the vix is > 25 as there is quite a bit of fear in the market. Compare this to 3/02 and you'll see much lower vix levels and % moves. The bottom line is this: when the market is falling, fear is created and the vix rises. It is just the opposite when the market rises. There are exceptions as the market will have a change in the underlying tone though. Good trading.