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Volatility Index

Brian Ronaghan Apr 29, 2020

The CBOE’s Volatility Index (VIX) is an index that attempts to track investors’ expectations of market volatility over the next 30 days. It’s maintained by the Chicago Board Options Exchange, and also goes by the slang “fear index.”

So, what’s “volatility?” In finance, volatility is defined as the degree of variation of price over time. So a stock trades at $3, then $3.02, then $2.98? Low volatility. Another stock trades at $10,000, then $500, then $7.95? High volatility. The VIX tries to measure that for the entire market.

The VIX is calculated by comparing call and put options on the S&P 500 index and T-Bill rates. Although it attempts to predict future volatility (i.e. whether the market will move sharply up or down), many argue that it has little predictive power.

If you want to really get into the weeds, there’s also an index that tracks the volatility of the volatility index (VVIX). We at Marketplace aren’t quite ready for that, though.

 

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