Understanding the Chicago Board Options Exchange VIX Market Volatility Index

by Hank Coleman

You cannot go an hour of watching CNBC without hearing about the volatility index called the VIX (pronounced vicks like the throat lozenge).  The VIX is Wall Street’s favorite barometer of investor sentiment and market volatility is the brainchild of the Chicago Board Options Exchange which created it in 1993.

vix-indexThe Market Volatility Index (VIX) measures the volatility of the stock market and is the equivalent to the overall market’s gauge of investor fear.  Traders use VIX as a general inverse indicator of market volatility and sentiment.  A high VIX number means that there is a lot of bearishness or negative sentiment in the stock market.  A high number may indicate that a lot of investors think that that stock market’s prices will head lower.  A low VIX number therefore indicates market bullishness.

The VIX is calculated using a wide variety of S&P 500 options strike prices for puts and calls.  Many investors monitor it because it provides information that can be helpful in evaluating potential market turning points.  The media, like CNBC and other financial pundits, has been quick to latch onto the headline value of the VIX as a fear indicator and has helped to reinforce the relationship between the VIX and investor fear.

 Since 1990, the VIX’s mean is a little bit over 20, the high is just below 90 and the low is just below 10. It is estimated that the VIX peaked at about 172 on Black Monday, October 19, 1987.

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