When it comes to protecting our investments in the stock markets, it is necessary to have the most precise tools possible. One of those tools is the one we are going to analyze this time. This is the VIX – CBOE Volatility Index, also known as the Chicago Market Volatility Index. It is used as an indicator to see the possible abrupt changes in the stock market. This index is based on the S&P 500 and is one of the most consulted, especially in the moments of greater agitation of the stock markets.
An index to protect you from panic
Let’s first have a look at the concept of volatility. It is a measure that considers the frequency and intensity of price changes for certain assets, measured over a specific period.
Volatility is almost a psychological thermometer that measures the state of investors. It helps us understand how markets are feeling. Through volatility indices, we can tell if there is a concern, if there is calm and confidence, or if there is panic or fear in the stock markets.
When markets are calm, waters are smooth, and there are no clouds on the horizon, market volatility is said to be low. On the contrary, when volatility is high, it is because we are in the presence of panic or fear and the markets are characterized by abrupt falls.
What is the VIX – CBOE Volatility Index?
The Chicago Board Options Exchange Market Volatility Index, or to simplify things, VIX, is an index that measures market volatility, based on stocks that make up the S&P 500 index. For many experienced finance men, the VIX – CBOE Volatility Index is quite accurate and allows investors to protect themselves when they suspect that markets are going to fall, by taking positions through PUT options.
The VIX – CBOE Volatility Index takes a future perspective, 30 days from the present to be exact. But try not to get confused: this index does not consider the behavior of the markets backward. It has no intention to measure what happened before but to establish a possible action of the markets forward.
A brief history of the VIX – CBOE Volatility Index
As noted above, this index was created by the Chicago options market in 1993 and was initially established over the S&P 100. At that time, the S&P 100 accounted for 75% of market operations, while the S&P 500 accounted for only 16%.
Over time, this changed and the S&P 500 traded 13 times more than the S&P 100. Therefore, in September 2003, the Chicago options market changed the calculation formula of the VIX – CBOE Volatility Index and began to take the S&P 500 as the basis.
To make the exchange have more accurate comparisons, all calculations were modified to 1990, to have a historical reference concerning its evolution. The previous form of calculation did not disappear, but it changed its method and today is known as VXO.
Finally, let’s say that, if we are faced with a VIX measurement, we know that, if it is below 20, we have investors quite relaxed and operating calmly. A measurement between 20 and 30 means the behavior is between optimal parameters, and if it exceeds 30, we know that there is nervousness in the markets and it’s time to redefine strategies and make some decisions.
This is how we got to know the VIX – CBOE Volatility Index, a tool that helps us to protect ourselves from the effects of fear and panic in the markets.