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Technical Analysis, Studies, Indicators:
VIX, VXN and VXO Volatility Indexes
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Studies
The VIX (CBOE Volatility Index) is based on the S&P 500 stock
index option prices and measures the market expectations of near-term
volatility. The VIX has been introduced in 1993. VIX is considered an indicator
of investor sentiment and market volatility.
The VXN (CBOE NASDAQ Volatility Index) and VXO (CBOE Volatility Index) are other
volatility indexes. VXN is based on the NASDAQ 100 index (NDX) options.
VXO is based on the S&P 100
index (OEX) options. Until 2003, the VIX index
calculation was based on the CBOE S&P 100 index (OEX). With the introduction of
the new and revised, more robust calculation methodology, the underlying index
was changed to the CBOE S&P 500 Index options (SPX). Yet, the CBOE has made a
decision to continue calculating volatility index based on the S&P 100 under the
new ticker - VXO volatility index.
The high volatility index value indicates the increased panic in the
stock
market. At the same time the low volatility index would indicate more stability
in the market.
Chart 1: VIX, VXN, VXO and S&P 500
The volatility indexes are used in trading systems to trade
underlying options and futures (VIX options and futures,
S&P 500 options ...) as
well as a measurement of the market sentiment in the
trading systems based on
the index analysis.
In some cases, traders use volatility indexes to analyze the overall sentiment
for equity options rather than for the whole stock market. However, in many
cases the relationship of the VIX/VXN/VXO to equity options can be easily
overstated simply because different dynamics drive the volatility of the S&P 500
index options and individual equity options, and the two can often be
uncorrelated. For instance, technology stocks are usually more volatile than the
utility stocks and to use the VIX to represent the volatility of stock from
these two sectors could be overly simplistic.
Chart 2: High VIX and S&P 500 support
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