Exchange traded funds continue to increase in number and popularity, growing to one of the most commonly traded securities on the stock exchange as both institutional and the average retail investor gain greater access to broad or specialized market exposure. Yet many individuals are unfamiliar with ETFs’ inner workings. In this ongoing series, we hope to address your questions and help shed light on the investment vehicle. [What is an ETF? — Part 27: 130/30 Strategy]
The CBOE Volatility Index, or simply the “VIX,” is a widely observered indicator for investor sentiment in the stock market. Exchange traded products that track VIX futures allow investors to profit during rising volatility or hedge against short-term turns.
Launched in 2004, the VIX Index is a relatively new concept. The VIX tries to measure expected or implied volatility on large-capitalization U.S. stocks through options traded on the S&P 500 index. The CBOE Volatility Index is based on the prices of a weighted blend of call and put options. As options premiums rise, expectations on future volatility in the underlying S&P 500 index also rise.
The index is a popular tool for options and equity traders, and it has been widely used as a measure of market risk, acting as a key barometer of investor fear and confidence in the markets. Generally, a high VIX reflects the spiking investor fear in the markets, and a low VIX shows investor complacency in a calm market.
Basically, the VIX helps provide an overview of how volatile investors think the markets will be over the next 30 days. Historically, the VIX has hovered between 15 and 20. Anything below 20 generally corresponds with less fear in the market or greater complacency, whereas readings above 30 are typically associated with high volatility. For instance, during the height of the 2008 financial crisis, the VIX almost topped at 90.