Remember that scene in Rush Hour when Chris Tucker and Jackie Chan teamed up to kick some butt? They stayed together but fought in different directions to maximize their attack. Their method of attack is similar to the VIX and the S&P 500.
The VIX is the Volatility Index. It is managed by the Chicago Board of Exchange and it measures the market’s expectation of 30 day volatility based on S&P 500 options prices. Volatility is basically movement. Just like Jackie Chan and Chris Tucker, prices can go up or down in wild swings. The more wildly the price swings, the more volatile that price is.
The VIX was introduced as recently as 1993. It is based on the prices of both S&P 500 calls and puts. The idea is that investors trade based on fear and the VIX tracks the fear and uncertainty of investors through the option volume.
As you can see, the VIX tends to spike each time the S&P 500 index drops. The highest spike was during the recession and market drop in 2008. Traders can use this information to their advantage to plan a strategy for volatility. There are VIX options, VIX futures and options on VIX futures. So there are numerous ways to use this tool in your portfolio.
Before you start to trade the VIX, you should know that the CBOE plans to update the VIX methodology to reflect “the way financial theorists, risk managers and volatility traders think about – and trade – volatility.” The new symbol will be VXO. Also remember that options can be risky. Visit the Chicago Board of Options Exchange website at CBOE.com for more educational resources.
Standard & Poor’s, S&P, S&P 100, S&P 500, and S&P SmallCap 600 are registered trademarks of McGraw-Hill Inc. CBOE Volatility Index, FLEX, FLexible EXchange, LEAPS, MNX, OEX, VIX, XEO CBOE, and Chicago Board Options Exchange, are registered trademarks of Chicago Board Options Exchange, Incorporated. VXN(SM) and SPX(SM) are trademarks of Chicago Board Options Exchange, Incorporated. The methodology of the CBOE Volatility Index is owned by CBOE and may be covered by one or more patents or pending patent applications.