The VIX - The Fear Barometer of Wall Street
The VIX measures the expected volatility of the S&P 500 Index (SPX) over the next 30 days
Volatility refers to the movement in the price of an underlying asset or security, such as a stock, index or commodity, over a period of time. Volatility is calculated based on historical data and certain statistical methods.
A high volatility indicates a large price fluctuation. The price can rise sharply, but it can also fall significantly. The higher the volatility, the higher the risk and the greater the price movements, both up and down. In other words, if you are interested in risk taking, high volatility could be something for you. If, on the other hand, you like lower-risk investing, lower-volatility assets may be a better choice.
The VIX - The Fear Barometer of Wall Street
The CBOE Volatility Index, or VIX for short, is an important indicator for market participants, reflecting the nervousness of the U.S. stock market. Therefore, the index is often used by investors and the financial press to assess the current situation on Wall Street. The VIX measures the expected volatility of the S&P 500 Index (SPX) over the next 30 days. Despite the tense geopolitical situation and difficult economic conditions, the index is as low as it was before the start of the Corona pandemic in early 2020. Does this present an opportunity for investors?
How is the VIX calculated?
In the financial world, the term "volatility" refers to the price fluctuations of a security. The higher the volatility, the greater the fluctuations; the lower, the weaker. Volatility is therefore an important indicator for market participants to assess the risk of various financial securities. In principle, volatility can be measured in two ways. On the one hand, the volatility of a financial instrument can be calculated from historical time series to find out how strongly the price fluctuated in the past. This is possible with the help of simple statistical calculations, but only provides information about the volatility realized in the past. And as is so often the case, the same applies here: Past performance is not a reliable indicator of future performance.
Another way to determine the volatility of a financial instrument is based on the options traded on it. To determine the price of an option, one needs a number of input factors, such as the price of the underlying, its expected volatility, the remaining term to maturity and the interest rate level. If, on the other hand, one has already given the price of the option or is observing it on the market, one can, in reverse, derive from it the volatility expected by market participants and thus obtain a kind of forecast for the future. This latter method is also used by the Chicago Board Options Exchange (CBOE) to calculate the level of the VIX. The aim of the index is to measure the market's expected volatility of the S&P 500 Index over the next 30 days. For this purpose, the current market prices of call and put options on the S&P 500 with such a maturity are used.
Where does the index currently stand?
This autumn, the VIX was it at its lowest less than 13 points (September) and thus at a thoroughly low level, which has not been reached since the beginning of 2020. By way of comparison, in March 2020, the index shot up to over 85 points within a very short period of time, when the S&P 500 crashed by around 35 percent in the face of the Corona pandemic. This illustrates that, as a rule, strong corrections in the S&P 500 are accompanied by increased expected volatility and thus a higher index level. In the financial crisis of 2008, the VIX even rose to almost 90 points, which is the all-time high to date.
Currently, the VIX is hovering between 16 and 20 points (16.10.2023). While we are certainly not currently in the midst of a global financial crisis like the one in 2008, and while the pandemic is now behind us, the current geopolitical turmoil and economic challenges raise the question of why the VIX is currently quoted at such levels. According to US investment bank Goldman Sachs, economic risks and seasonal factors can push the fear barometer upwards. On the economic side, the persistent inflation, which has also been a problem for the US Federal Reserve for some time, plays a role. Furthermore, Goldman Sachs observes in historical data a tendency for volatility to increase between August and October, which could be due to an increase in trading activity after the summer break. Nevertheless, these factors do not necessarily lead to an increase in the VIX.
VIX, one year daily chart
VIX, five year weekly chart
How to participate?
Vontobel currently offers Bull & Bear certificates on CBOE VIX futures. VIX Futures are forward contracts on the index described above. For short-term oriented investors who want to trade intraday on the VIX Future, Bull & Bear certificates are ideal. This makes it possible to participate in the fluctuations of the futures with a constant leverage during the day. Investors can choose from whole-number factors ranging from minus 4 to plus 4. However, Bull & Bear certificates are not suitable for longer-term investment due to their path dependence. In addition to the risk of price fluctuations, investors should be aware of the potential losses that may occur, particularly for this product, in the event of a rollover of the underlying asset.
This information is neither an investment advice nor an investment or investment strategy recommendation, but advertisement. The complete information on the trading products (securities) mentioned herein, in particular the structure and risks associated with an investment, are described in the base prospectus, together with any supplements, as well as the final terms. The base prospectus and final terms constitute the solely binding sales documents for the securities and are available under the product links. It is recommended that potential investors read these documents before making any investment decision. The documents and the key information document are published on the website of the issuer, Vontobel Financial Products GmbH, Bockenheimer Landstrasse 24, 60323 Frankfurt am Main, Germany, on prospectus.vontobel.com and are available from the issuer free of charge. The approval of the prospectus should not be understood as an endorsement of the securities. The securities are products that are not simple and may be difficult to understand. This information includes or relates to figures of past performance. Past performance is not a reliable indicator of future performance.