The CBOE VIX (Volatility Index) tracks the ratio of puts to calls on Stock Options for companies in the S&P 500 (SPX). This can be used as a barometer to assess how volatile the S&P is. When the VIX is high, this implies that more puts are being purchased because there is an expectation that the market will fall and Volatility increase as a result.
The VIX is sometimes referred to as the 'fear index' since it implies that more investors are seeking to purchase puts in to insure their positions in anticipation of a declining market. The VIX tends to be mean-reverting and after periods of high Volatility, puts will be quickly sold once the protection is no longer deemed necessary, this can cause the VIX to fall sharply.
It is possible to trade derivative instruments like Options, Futures and ETFs/ETNs on the VIX itself to potentially profit from an opinion about volatility in the S&P 500. As with other index options, these are cash-settled contracts.
Contributed by: Ralph Windsor
The VIX is sometimes referred to as the 'fear index' since it implies that more investors are seeking to purchase puts in to insure their positions in anticipation of a declining market. The VIX tends to be mean-reverting and after periods of high Volatility, puts will be quickly sold once the protection is no longer deemed necessary, this can cause the VIX to fall sharply.
It is possible to trade derivative instruments like Options, Futures and ETFs/ETNs on the VIX itself to potentially profit from an opinion about volatility in the S&P 500. As with other index options, these are cash-settled contracts.
Related Directory Entries
Featured Video
CBOE- VIX Trading Strategies
In this Interactive Brokers sponsored video, Russell Rhoads of CBOE discusses volatility trading via the VIX volatility index. Strategies described are based on VIX index options and futures in addition to VIX ETNs.
View Interactive Brokers in Options Market Glossary Directory
External Links
CBOE Volatility Index (VIX)http://www.cboe.com/micro/vix/vixintro.aspx
CBOE introduction to the VIX.
View CBOE Options Dictionary in Options Market Glossary Directory
When is the Best Time to Start Trading a Volatility Strategy?http://www.vixstrategies.com/best-time-start-trading-volatility-strategy/
VIX Strategies article about planning an entry into a short volatility strategy by selling cash-secured naked puts on SVXY (amongst other subjects).
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