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Strategies & Market Trends : Waiting for the big Kahuna -- Ignore unavailable to you. Want to Upgrade?

To: kas1 who wrote (11639)	12/15/1997 2:38:00 AM
From: Richard Estes	Respond to of 94695

CBOE Market Volatility Index In 1993, the Chicago Board Options Exchange introduced the CBOE Market Volatility Index. The CBOE Market Volatility Index, known by its ticker symbol VIX, measures the volatility of the U.S. equity market. It provides investors with up-to-the-minute market estimates of expected volatility by using real-time OEX index option bid/ask quotes. The VIX is calculated by averaging S&P 100 Stock Index at-the-money put and call implied volatilities. The tendency of market volatility to expand during market downturns is clear. This tendency is the subject of numerous academic studies of the options market. Perhaps the best way to understand the relationship between volatility and market declines is to look at the options market from a "put'' perspective. A put is the option market equivalent of an insurance policy. An investor may purchase a put to insure a sale price for the underlying asset. The seller (writer) of a put may be viewed as the equivalent of an insurance underwriter. The put writer accepts a premium in return for accepting a risk, which in this case is ownership of the underlying asset. In the insurance business, premiums rise following significant negative events (such as a hurricane). In the options business, market volatility, the critical factor in determining put premium levels, increases in periods of market distress. The same factor that leads to an increase in put premium levels, increased volatility, causes call option premiums to increase at the same time. Thus, put premium levels and call premium levels move together because they are both related to volatility. This relationship is critical to the option strategist. High call premiums during periods of market distress are the opposite of what most investors would expect.