The CBOE Volatility Index, known by its ticker 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. It is colloquially referred to as the fear index or the fear gauge.
In Australia we have a similar volatility index designated XVI, it’s our version of the US VIX.
The current XVI concept formulates a theoretical expectation of stock market volatility in the near future.
The calculation for the XVI compares the near term pricing of PUT options. Or the change in price of near term or current month compared to second month expirations. The XVI is the square root of the risk-neutral expectation of the XJO 200 variance over the next 30 calendar days and is quoted as an annualized standard deviation, if you want the technical explanation.
The top chart below, shows the weekly XVI values and highlights the major milestones of the trade war saga between China and the US.
The movements over the “13.00” level tend to be bearish for equities as forward prices of Options become more expensive as fear or uncertainty grips the markets. As the market digests the news and positive news enters the market volatility drops, read forward pricing drops, and equities rally higher. Levels below “11.00” infer the markets are not anticipating volatile events in the near future, the current reading is 11.02 a relatively low level of uncertainty of future developments.
The lower chart is the Weekly XJO cash index with the same announcements marked showing the correlation of the XVI and the underlying market movements. Bear in mind the overall Primary movement of the Index is up for 2018 so-far.
