VIX

This is the Chicago Board Options Exchange volatility index, one of the most closely watched of all market indicators.

It is used to gauge overall market sentiment via activity in the options market. Option traders also use the VIX as a tool to measure the market’s current assessment of risk.

Simply put, the VIX rises and falls to reflect the fear or complacency of investors. A high number, say 30 and over, indicates a great amount of concern and the likelihood that investors will sell their shares. A low number, say 20 and under, indicates a happy investor who is likely to hang onto his shares and probably add more.

Savvy investors and even day traders check the VIX to help them better time their entry into and exit from positions.

This year there are three big changes in the VIX. First, the exchange, the CBOE, will no longer use the S&P 100 representing 100 large-cap stocks on which options are traded. The new VIX will use the S&P 500, a broader index. This is expected smooth the day-to-day gyrations of the VIX.

Also, there is a new method of calculation. Rather than measuring volatility based on the prices for at-the-money options on the underlying index, the CBOE now measures volatility based on option premiums over a wide range of index strike prices including out-of-the-money puts and calls. Most important, in our view, will be the introduction early next year of derivatives based on the VIX. The CBOE has already received the OK to start a new market in futures led by the VIX. If the SEC follows through with its approval, the exchange will add options on the VIX.

You can read more about the VIX at http://www.cboe.com

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