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INVESTING EXPLAINED: What you need to know about the Chicago Board Options Exchange Volatility Index, a barometer of investor confidence
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In this series, we break through the jargon and explain a popular investment term or theme. Here it is the Chicago Board Options Exchange Volatility Index.
No other acronym…
‘Fear so. The CBOE (Chicago Board Options Exchange) volatility index is also known as the VIX or the Fear Gauge as it acts as a barometer of investor confidence.
This close-monitoring index is designed to track the expected volatility of the US S&P 500 index, based on data from options contracts. There are two types of options. A ‘call’ that gives the holder the right to buy a stock (or other asset) at a fixed price in the future, and a ‘put’ that gives the right to sell.
Barometer: This close-monitoring index is designed to track the expected volatility of the US S&P 500 index
Who invented it?
The VIX was launched in 1993. Its cornerstone was research conducted in the 1980s by two academics who are now professors of economics, Menachem Brenner and Dan Galai. The latter, who argues that investors don’t understand risk well, says the VIX is useful because it “gives you an indication of the risk perception in the market.” The CBOE now also provides the VVIX, a measure of the volatility of the VIX.
Can you bet on the VIX?
Of course… if you have a strong guts and deep pockets. investors can buy put options if they believe the VIX will fall as fear subsides. If they think the index will rise as fear increases, they can buy call options. Some investors use such options to hedge their positions in stocks. They may be convinced that these stocks have great long-term prospects, but want to protect themselves against short-term losses caused by volatility.
Why has it been in the news?
The VIX is never really out of the news as it is considered a proxy for the mood of the markets. But late last week, Wall Street was rocked by reports that a trader had bought 50,000 call options, worth about $950,000, in a bet that the VIX would climb to 150 by March 2023.
this represents a significant point. After all, a lot can happen between now and March. for example, there are several decisions by the US Federal Reserve on interest rates. the trader in question (their identity has not been revealed to date) may either be full of mischief or eager to hedge a substantial stock portfolio. Maybe both.
What’s the most recent?
The current level of the VIX is 33 – an increase of 102 percent since the beginning of the year. it peaked in late February and early March after the Russian invasion of Ukraine. the index reached 75 in March 2020 when the pandemic hit, rising to 82.69, its all-time high as America imposed Covid travel bans. In that month, the UK Ruffer investment trust made a profit of $2.6 billion on VIX put options.
What can the VIX teach me?
Some argue that “when the VIX is high, it’s time to buy.” If the ViX is low, look down!’ suggesting peak pessimism is a moment of opportunity – if you can afford to be daring. But you can also believe, like the influential thinker Nassim Nicholas Taleb, author of The Black Swan, that volatility is the norm, and that we must learn to embrace it, accepting that we cannot predict the future – whatever an index may seem. to tell us.