Feb 6, 2018

3 questions about the CBOE Volatility Index (VIX), answered

Data: Money.net; Chart: Axios Visuals

Credit Suisse announced the last day of trading for volatility-related security XIV would be Feb. 20, reports CNBC. Trading was halted Tuesday morning after the security plunged 85% in aftermarket hours.

Why it matters: Near-record volatility can have implications far beyond what happens to individual stocks, wiping out investments that had been viewed as safe just days ago.

What is implied volatility?

Implied volatility (IV) is a forward-looking, subjective tool that measures the expected variations in the price of a security. IV generally increases when investors believe a security's price will fall over time and decreases when the price is expected to rise.

IV is an estimate of future prices that is based on probability, meaning that there is no guarantee a security's price will follow a predicted outcome. Its utility stems from its correlation with market opinion, which has a direct impact on how options are priced. It's also important to note that IV does not predict the direction of a price fluctuation. High volatility indicates a large price swing, but does not indicate whether that swing will be up, down or both.

What is the VIX?

The Chicago Board Options Exchange (CBOE) introduced the VIX in 1993 as a measure of the 30-day implied volatility of eight S&P 100 options. Today, the VIX is a computed index that aggregates the volatility of options prices on the S&P 500, and is widely considered "the premier benchmark for U.S. stock market volatility," or "investor fear gauge," according to CBOE.

The VIX began offering futures contracts in 2004, allowing investors to bet on the expected volatility of the S&P over the next 30 days. VIX values greater than 30 are generally associated with high market volatility, while values lower than 20 tend to indicate a calmer market.

What is its impact on the market?

Per Axios' Dan Primack, the VIX volatility index yesterday spiked in a way we've only seen three other times since it was created in 1993:

  • 1999 dotcom crash
  • 2009 credit crisis
  • 2011 fears over debt ceiling vote

... and then it went even higher in the aftermarket. Several exchange-traded notes inversely related to the VIX, including XIV, have experienced a free fall as volatility spikes. Some fear that Credit Suisse and other volatility-related issuers' move to liquidate their funds will further drive up the VIX and trigger another big equity sell-off.

Go deeper

The stock market's quiet end to 2019

Data: Money.net; Chart: Axios Visuals

The S&P 500 rose half a percent on Thursday to top the 3,200 level for the first time.

The big picture: A year that saw equity prices whipsawed by trade war uncertainty and recession fears is ending (so far) on a relatively quiet note.

Go deeperArrowDec 20, 2019

Mapping credit inequality in the U.S.

Data: New York Fed; Map: Danielle Alberti/Axios

This map is a vivid depiction of credit inequality in the United States. The dark areas show counties where a large proportion of the population has no access to credit, while the lighter areas are considered "credit-assured" or "credit-likely."

Why it matters: Communities with good access to credit can grow faster and prove more resilient to shocks than their less creditworthy counterparts.

Go deeperArrowDec 19, 2019

The S&P 500 could be overvalued

The New York Stock Exchange on Jan. 8. Photo: Xinhua/Wang Ying via Getty Images

The S&P 500 is too rich on a number of levels, according to calculations in a new paper from Ned Davis Research that examines the index's price to earnings, profits and price to sales.

What's happening: Not only is the benchmark stock index's current P/E ratio "well above fair value," S&P companies' prices relative to sales is at a record high, “well in excess of what they were in 2000 or 2007 at those peaks,” Ned Davis, the company's senior investment strategist, says in a note to clients.

Go deeperArrowJan 9, 2020