To: James F. Hopkins who wrote (12725 ) 1/7/1998 12:03:00 AM From: ftth Read Replies (4) | Respond to
James: I'll try and describe whatV olatility IN dex, created during the day by the CBOE. Quotes-Plus has the VIX as one of its available indexes with open-high-low-close daily data. It is created from the implied volatilities of eight near-the-money, nearby, and secondary nearby S&P100 index options (calls and puts), normalized for time to expiration and amount ITM/OTM (in the money, out of the money). In general, the VIX trends slowly downward during a stable uptrend (meaning that the premium being paid for future increases is lessening as the market itself increases in value), and generally trends upward during market declines. The basic meaning of VIX is that option premiums are high (i.e. options are expensive when viewed historically) when VIX is high, and options are cheap when VIX is low (after all, that is exactly the data that VIX is constructed from--it represents the aggregate expectations of all participating traders as to where the price is likely to be at expiration). Large, abrupt market changes produce spikes in the VIX (it nearly doubled intraday on Oct 27/28 (to a high of about 55) from where it was 3 days prior. The value of the VIX (or a deriviative thereof)is that certain levels and trends in implied volatility have rather convincingly identified turns in the market throughout time, in an analogous way to bollinger bands on stocks. VIX can also be used as a confirming signal on broader market turning points.
