VIX, the Volatility Index
Last week, on Monday the VIX surged by 115.6% to 37.32. On Tuesday it rose above 50 before fading to roughly 35. The last time it surged above 50 was in August of 2015.
So, what is the VIX Index and why traders care?
The CBOE Volatility Index, widely known as the VIX, is a popular measurement of the stock market's volatility expectations implied by the S&P 500 Index options. The CBOE Volatility Index, or VIX, is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices.
Volatility refers to the amount of uncertainty in the size and direction of changes in a security's value and is typically measured by the deviation of returns.
VIX is calculated and published by the Chicago Board Options Exchange (CBOE). Sometimes it is called the fear index or the fear gauge.
The VIX index was launched in 1993 but the current form as we know it now was introduced in 2003, with good indexing principles that laid the foundation for current success. The calculation takes into account the options on S&P 500 to ensure liquidity. It provides the critical link to develop tradable products to hedge and arbitrage OTC volatility derivatives and for transparency purposes VIX is calculated directly from option prices in an independent model way.
The formulation of a volatility index, and financial instruments based on such an index, was developed by Menachem Brenner and Dan Galai in 1986. A volatility index would play the same role as the market index play for options and futures on the index.
The current VIX concept formulates a theoretical expectation of stock market volatility in the near future. The current VIX index quotes the expected annualized change in the S&P 500 index over the next 30 days, as computed from options-based theory and current options-market data.
While there is no direct trading in the VIX, it is used by a number of derivative securities including futures and exchange-traded notes as a reference for volatility.
VIX, Timeline of the History
1923: S&P index was introduced
1957: Modern S&P 500 Index was created as a measurement of US stock market
1975: First S&P 500 index mutual fund was created by Vanguard
1982: S&P 500 Index Futures were listed on CME
1983: Options were listed on CBOE
1993: ETF launched by SSgA on NYSE
1993: CBOE introduced the VIX
2003: Current version of VIX was created
2002: CBOE S&P 500 BuyWrite index was introduced
2004: Futures were listed on CFE
2006: Options were listed on VIX
2009: VIX ETNs