VIX Index: a key indicator of volatility in financial markets

What is the VIX index?

VIX, also known as the “fear index”, is one of the most important volatility indicators in financial markets. This index attracts the attention of traders around the world due to its ability to reflect the level of market uncertainty and potential risks.

Key Characteristics of the VIX Index

• VIX usually rises when there are significant fluctuations in the markets and asset prices are falling.
• Investors use VIX-based financial instruments to hedge risks.
• The index is based on options prices for the S&P 500, reflecting market expectations for future volatility.

Volatility in the Context of Investing

Volatility in the financial world measures the degree of fluctuation in the price of an asset. For example:

• A stock with daily fluctuations of 1% is considered more volatile than a stock with fluctuations of 0.5%.
• High volatility is often associated with increased risk and potentially greater profits or losses.

Types of Volatility

1. Historical volatility:

   • Analyzes past price fluctuations of the asset
   • Used to assess the stability of an asset in the past

2. Implied volatility:

   • Based on current option prices
   • Reflects market expectations regarding future volatility

History and Development of the VIX Index

• Created by the Chicago Board Options Exchange (CBOE) in 1993
• Initially based on options of the S&P 100 index
• Later expanded to reflect the S&P 500, which includes the 500 largest publicly traded companies in the US.

Dynamics of the VIX Index

• Normal fluctuation range: 10-25 points
• Peak values:
  • During the financial crisis of 2008: over 80 points
  • During the corona crisis of 2020: also exceeded 80 points

The Relationship Between VIX and S&P 500

• VIX and S&P 500 have an inverse correlation
• When stock markets fall:
  • The demand for put options is increasing
  • The price of options and their implied volatility are increasing
• VIX is rising, reflecting increased market uncertainty

Technical Aspects of VIX Calculation

• Based on S&P 500 options with a maturity of 23-37 days
• Includes traditional and weekly options
• Excludes options without quotes
• The calculation is performed in real-time using complex algorithms.

Using VIX in Hedging Strategies

• VIX-based financial instruments:
  • VIX Options
  • VIX Futures
  • ETFs related to the volatility index
• These products allow investors to protect themselves from market downturns.
• Important: Such tools are associated with high risks and require a deep understanding of the market.

Variations of the VIX Index

• CBOE has developed volatility indices for various stock indices:
  • Dow Jones
  • Russell 2000
• There are volatility indicators for different time horizons.
• European stock markets also have similar volatility measurement instruments.

The Significance of VIX for Market Analysis

• VIX is a key indicator of market “sentiment”.
• Helps assess the level of risk and uncertainty in financial markets
• Used in both short-term and long-term market trend analysis