Tara Dziedzic is a Managing Director in Global Corporate Client Group at NYSE Euronext. She is responsible for managing relationships of the...
95 years ago, Albert Einstein published the General Theory of Relativity. I suppose we can approach volatility with a theory similar to the one that Einstein asserted –it is complicated and it is relative.
Despite huge swings in the market over the last two weeks (we’ve experienced EIGHT triple digit moves in March), the VIX closed down slightly at 20.21 and reached a high on Tuesday of 20.59 - - relative to the 52 week high of 48.20…and to the VIX’s historic high of 89.53 on October 24, 2008 (when it spiked on concerns about the 2008 FinancialCrisis).
TheVolatility Index (VIX) is an index which measures expectations of volatility, or fluctuations in price, of the S&P 500 Index. Higher values for the volatility index indicate that investors expect the value of the S&P 500 to fluctuate wildly (up or down…or both) in the following 30 days. The VIX is also known as the "fear index" because a high VIX represents uncertainty about future prices. The index is calculated using the price of near-term options on S&P 500 index. Because the value of an option is closely linked to the expected volatility of its underlying security, options prices can be a useful indicator of investors' expectations of volatility.
Volatilityis the rate at which the price of a security moves. A security with high volatility has bigger fluctuations in price compared to a security with low volatility. The more quickly a price changes up and down, the more volatile it is. As such, volatility is often used as a measure of risk.
Implied Volatility & the VIX: Volatility is different from Implied Volatility, in the sense that volatility is observed by looking at past data, whereas Implied Volatility represents expectations about future fluctuations. The VIX is calculated by taking into account Implied Volatility on near-term S&P 500 options with different strike prices. Hence, it represents investor's expectations on how drastically the index may fluctuate in the near future.
VIX was officially launched on 4/1/93, but I found the chart attached that back-dates the data with historic events. Interesting.
The second chart includes the VIX since 2008…which shows that volatility is “relatively” low...
Sources: Thomson, Wikinvest, & Historical Look at the Volatility Index