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Putting the VIX into Context

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PETERSON: With the VIX dropping down to 5-month lows, I thought it might a good time to touch on what this index is and what it is implying about the current market environment. So, the VIX essentially take a basket of options on the S&P 500 and comes up with a estimated 30-day future volatility on this index.

So, when you think about volatility what does that mean to you? Think of price swings, larger price swings. So, larger price swings have a tendency to indicate higher uncertainty. So, when you have higher uncertainty, the demand for protection can go up, and this is what gets reflected in the VIX. So, tying this all together, the S&P 500 right now is also trying to break out to 5-month highs. In fact, on the technical basis it looks like it’s trying to get above that roughly 2800 to 2816 resistance level. As the market moves higher, there’s a tendency for the VIX to move lower. There’s this inverse relationship between the S&P 500 and the VIX. As the market’s moving higher, there’s a tendency to be more comfortable about the future market environment, therefore the VIX is low, and when the market begins to sell off, uncertainty has a tendency to go up, and that also gets reflected in the VIX as it moves higher.

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Definitions

S&P 500: a market capitalization-weighted index of 500 of the most widely-held U.S.

companies in the industrial, transportation, utility, and financial sectors.

The Cboe Volatility Index, known by its symbol VIX, is a popular measure of the stock market's expectation of volatility implied by S&P 500 index options, calculated and published by the Chicago Board Options Exchange (Cboe).

(0319-9C3F)

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