VIX Volatility Index
The VIX takes the weighted average of implied volatility for the
Standard and Poor's 100 Index (OEX calls and puts) and measures the
volatility of the market. A low VIX indicates trader confidence. A
high Vix the opposite. Dividing the S&P 500 by the Vix (ratio) gives
the confidence level in relation to the market. The higher the ratio
the higher the confidence.
VIX, the ticker symbol for the Chicago Board Options Exchange (CBOE)
Volatility Index and represents the implied volatility on the S&P 100
(OEX) option. This volatility is meant to be forward looking and is
calculated from both calls and puts that are near-the-money. The VIX
is a popular and widely used measure of market risk.
Investopedia says,
Introduced by the CBOE in 1993, VIX is a weighted measure of the
volatility for eight OEX put and call options. The eight puts and
calls are weighted according to the time remaining and the degree to
which they are in- or out-of-the-money. The result forms a composite
hypothetical option that is at-the-money and has 30 days to
expiration. VIX represents the implied volatility for this
hypothetical at-the-money OEX option. Typically, VIX has an inverse
relationship to the market, which means that a rising stock market is
viewed as less risky and a declining stock market more risky. The
higher the perceived risk is in stocks, the higher the implied
volatility and the more expensive the associated options, especially
puts. Hence, implied volatility is not about the size of the price
swings, but rather the implied risk associated with the stock market.
When the market declines, the demand for puts usually increases.
Increased demand means higher put prices and higher implied
volatilities.