{"id":743,"date":"2009-11-09T14:15:59","date_gmt":"2009-11-09T08:45:59","guid":{"rendered":"http:\/\/www.niftylivecharts.com\/blog\/?p=743"},"modified":"2009-11-09T14:15:59","modified_gmt":"2009-11-09T08:45:59","slug":"measuring-stock-market-volatility","status":"publish","type":"post","link":"https:\/\/www.niftylivecharts.com\/blog\/measuring-stock-market-volatility\/","title":{"rendered":"Measuring Stock Market Volatility"},"content":{"rendered":"

Measuring the S&P 500 on the VIX<\/strong><\/p>\n

The composition of the VIX was changed in 2003.\u00a0 At that time, the CBOE created a “new” VIX by making two changes to the original version.\u00a0 First, options on the S&P 500 index were substituted for those on the S&P 100.\u00a0 The CBOE decided that the S&P 500 \u2014 a widely followed average commonly used by mutual funds as a benchmark to judge their performance results \u2014 was more representative of “the market” than the S&P 100.<\/p>\n

The second change made by the CBOE was to increase the amount of options used in the calculation of the weighted average.\u00a0 It was thought that by expanding the number of options used to calculate the weighted average, the VIX in its newer form would provide a more accurate representation of the level of implied volatility currently existing among option premiums in the market.<\/p>\n

All options used in the VIX calculation are either in the front month \u2014 i.e. the nearest month to expiration \u2014 or the second month.\u00a0 The reason the CBOE limits options to the two nearest months is because it is their goal for the VIX to estimate the implied volatility of what an at-the-money option on the S&P 500 would contain with 30 days left until expiration.<\/p>\n

The VIX is quoted in terms of a number between 0 and 100 \u2014 and normally trades at the far lower end of that range.<\/p>\n

That number represents the anticipated percentage movement \u2014 both up and down \u2014 in the S&P 500 index over the next 30 days.\u00a0 So, for example a VIX reading of 24 would mean that \u2014 based upon the implied volatility in the options on the S&P 500 index in the front and the second months \u2014 the index is expected to move within a range of 2% (the 24 VIX reading divided by 12 months) over the next 30 days.<\/p>\n

So, why is the VIX important?\u00a0 For one, it provides you with a reasonable projection of the expected range within which the S&P 500 is likely to trade within the next month.Keep in mind that the VIX changes on a minute-by-minute basis, according to the ongoing changes in the implied volatility in the S&P 500\u2019s nearest two months\u2019 option premiums.<\/p>\n

Therefore, the VIX \u2014 and hence the projection of the S&P 500\u2019s trading range for the next month \u2014 is being constantly revised.\u00a0 Nevertheless, that projection \u2014 as gleaned from the latest VIX reading \u2014 is an accurate reflection of the attitude of traders and investors about current market conditions.<\/p>\n

And that reflection of traders and investors\u2019 attitudes is the heart of the VIX\u2019s value.\u00a0 When you can correctly gauge market participants\u2019 attitudes \u2014 and then use that information to anticipate likely future price action \u2014 you have acquired an additional edge in your efforts to make money in stocks.<\/p>\n","protected":false},"excerpt":{"rendered":"

Measuring the S&P 500 on the VIX The composition of the VIX was changed in 2003.\u00a0 At that time, the CBOE created a “new” VIX by making two changes to the original version.\u00a0 First, options on the S&P 500 index were substituted for those on the S&P 100.\u00a0 The CBOE decided that the S&P 500 […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_genesis_hide_title":false,"_genesis_hide_breadcrumbs":false,"_genesis_hide_singular_image":false,"_genesis_hide_footer_widgets":false,"_genesis_custom_body_class":"","_genesis_custom_post_class":"","_genesis_layout":"","footnotes":""},"categories":[1],"tags":[2381,2388,2384,2382,2389,2383,2387,2378,2386,2385],"class_list":{"0":"post-743","1":"post","2":"type-post","3":"status-publish","4":"format-standard","6":"category-general","7":"tag-chicago-board-options-exchange-cboe","8":"tag-sp-500-on-the-vix","9":"tag-sp-index","10":"tag-vix","11":"tag-vix-calculation","12":"tag-vix-option","13":"tag-volatility-index","14":"tag-volatility-indicator","15":"tag-vxd-tracks","16":"tag-vxn-tracks","17":"entry"},"_links":{"self":[{"href":"https:\/\/www.niftylivecharts.com\/blog\/wp-json\/wp\/v2\/posts\/743","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.niftylivecharts.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.niftylivecharts.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.niftylivecharts.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.niftylivecharts.com\/blog\/wp-json\/wp\/v2\/comments?post=743"}],"version-history":[{"count":0,"href":"https:\/\/www.niftylivecharts.com\/blog\/wp-json\/wp\/v2\/posts\/743\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.niftylivecharts.com\/blog\/wp-json\/wp\/v2\/media?parent=743"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.niftylivecharts.com\/blog\/wp-json\/wp\/v2\/categories?post=743"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.niftylivecharts.com\/blog\/wp-json\/wp\/v2\/tags?post=743"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}