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VIX – The Investor Fear Guage June 4, 2006

Posted by newyorkscot in Markets.

VIX recently hit a high for '06, signalling the return of some investor fear and increase in volatility. But then dropped again by the end of last week – indicating a more chilled out view of the market. Are investors confused and/or cautious at the moment ? They seemed to be buying relatively more puts than calls at the end of the week (to protect their portfolio).

The Chicago Board Options Exchange's Volatility Index (VIX) is a (single) measure of near-term implied volatility based on the S&P 500 stock index option prices. Originally introduced in 1993, it provides a measure of investors' view of the "riskiness" of the market. A decent explanation of VIX can be found here .

This "investor fear guage" allows investors to evaluate and buy portfolio protection in the form of VIX options (a relatively new product from CBOE – VIX option contract specifications can be found here.)

VIX has a couple of cousins : CBOE Nasdaq Volatility Index (VXN) which uses Nasdaq 100 index option prices; CBOE DJIA Volatility Index (VXD) and the CBOE Russell 2000 Volatility Index (RVX). You can also buy futures on the VIX, VXD and the 3-month and 12-month variances.

NOTE: the VIX itself is based on 30-days, does not include options of longer duration, does not factor in non-index options, and does not necessarily represent individual market sectors.

Still, it is an interesting index to track for the average punter.



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