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The VIX
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The VIX (volatility Index)The VIX was introduced by the Chicago Board Options Exchange (CBOE) in 1993 as an indicator to gauge option trader’s expectations. To date this index, one which is calculated using implied volatility of a wide range of S&P500 index options including Calls and Puts, is used by all types of investors, as they refer to the index to measure the overall fear in the markets.
While the equation might be extremely complicated, most people use the index by following the values;
A VIX trading at a level larger than 30, is generally associated with a large amount of volatility, something that is normally caused by selling pressure or uncertainty in the markets, for instance a market recession. A figure less than 20 is normally welcomed by traders, as it means that the markets are optimistic and comfortable with the current direction. When the VIX is low volatility decreases on all the tradable assets.Historical ChartsFrom a historical point of view, major market moves have always been associated with a sharp turn in the VIX.
For example during 2007 the VIX started to increase due to the housing problems that quickly spread throughout the economy. As the problems increased so did the VIX. The increasing VIX measured the implied volatility of options, showing that fear had entered the markets. By analyzing the VIX along with various assets one can see that the break of the VIX’s range, or in other words an increase above the 15 mark, signaled a major turning point for stocks.
The following year, during 2008 the major stock indices along with Carry Trades decreased by double digit numbers. The mass of the selling pressure came in September with the collapse of Lehman Bros. The VIX jumped by extraordinary proportions, breaking the 30 mark resistance level, to reach a high of 89.53.
That was a record high for the VIX since it was first introduced back in 1993.
When observing the following two charts one can see that as the VIX surged in price, so did the S&P 500 price drop.  One can also see on the following chart that a major increase of the VIX’s value occurred as the indices plunged lower, towards the end of 2008. The S&P500 dropped by over 40%, while the VIX climbed reaching extraordinary levels |
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