heinz - here's some backtested VXN information
Best,
JF3
thestreet.com
CBOE to Launch Nasdaq Anxiety Index
By Brian Louis
Staff Reporter
1/22/01 6:19 PM ET
Coming tomorrow to a screen near you: An anxiety gauge for the Nasdaq 100.
Tuesday morning, the Chicago Board Options Exchange will launch a new volatility index to estimate the fear in the Nasdaq market through the prices of a specific index options contract. Dubbed the VXN, giving it the alluring moniker of "The Vixen," it will extend what the reach of the CBOE's volatility measures beyond the core Volatility Index, which is based on the S&P 100 (or OEX) index.
The new CBOE Nasdaq Market Volatility Index will be based on the Nasdaq 100 options, making it a more pure read on tech stocks for a generation of investors fixated on those companies.
According to Duke University Professor Robert E. Whaley, who designed both the VIX and the VXN, the average annual reading of the VXN has always been higher than the VIX, and in the past two years, the difference between the two has increased dramatically. That should be no surprise, considering how much on a percentage basis the NDX can move on any given trading day, compared with the OEX.
The VIX illustrates the market's level of fear by rising when put-option buying increases on OEX options, showing an increasing desire to hedge via the options.
Traders interpret the VIX using contrarian theory, meaning low readings on the VIX are bearish, while high readings are bullish.
As with the traditional VIX, Whaley explains that there is an inverse relationship to the price action in the Nasdaq 100 index and the VXN. He notes that when the volatility index spikes up, the market usually falls that day.
He does point out, however, that in late 1999, when the Nasdaq was soaring, the VXN also rose sharply.
The situation was fleeting, and the relationship between the two has returned to the more standard relationship of if one goes up, the other goes down. But during that infamous Nasdaq run up, it was clear that the market was "increasingly nervous," and bidding up prices of NDX options, which in turn causes the VXN to go up, the professor says.
Traders and investors have longed for a VIX-like indicator for the Nasdaq, in part because volume in OEX options has fallen sharply in recent years and because gauging the Nasdaq's volatility has become a more important endeavor.
Beyond the OEX
According to a recent report by Schaeffer's Investment Research, using data from the CBOE, the average daily volume in OEX options has fallen to 70,000 from 325,000 over the past six years, a tumble of 80%. Because of the drop in volume in OEX options, some traders think the VIX isn't as valid or useful as it once was.
Options products based on other indexes now rival OEX options in both volume and stature. The most notable winner has been the options listing on the Nasdaq 100 unit trust (QQQ:AMEX - news), or QQQ, which trade on the American Stock Exchange.
"I'll watch the range on it," says Paul Foster, of 1010WallStreet.com in Chicago. "I've got many things I look at before I buy or sell something." Among them is the implied volatility on QQQ options.
Whaley, commissioned in June by the CBOE to develop the VXN, says it is constructed in the same formulaic way as the VIX, substituting the implied volatilities for NDX options for the OEX.
Implied volatility, a key factor in an option's price, is the annualized measure of how much the market thinks a stock or index can potentially move. It is a critical factor and generally measures uncertainty about the prospects for the underlying stock or index.
Using figures supplied by the professor, from 1995 to 1998, the VXN was about 40% higher than the VIX. In 1999, the VXN was 80% higher, while last year the VXN averaged readings 165% higher than the VIX. If the VIX was at 20, the VXN would be at 53.
Whaley says that this year the VXN has not closed below 73%. Those readings make it clear the market's anxiety about tech stocks continues, he says.
The VXN's highest level came last year, with a reading of 93.17%, which occurred on April 14, he says. On April 14, the NDX plummeted 348.11, or 9.8% to 3205.70.
The CBOE says VXN will be calculated and disseminated continuously throughout the trading day and can be accessed through the CBOE Web site .
--------------------------------------------------------------------------------
Send letters to the editor to letters@thestreet.com.
Read our conflicts and disclosure policy.
Order reprints of TSC articles.
-------------------------------------------------------------------------------- |
