- VIX, also known as the ‘fear index’, measures the anticipated move of the underlying instrument over a period of time.
- VIX is a complex calculation based on premiums of options contract of an instrument (generally a broader market index).
- It measures the 30-day implied volatility of the market and is an annualised figure.
The Volatility index or more commonly VIX is simply a quantitative measure of the volatility of an underlying financial instrument. Many times known as the ‘fear index’, VIX measures the anticipated move of the underlying instrument over a period of time (both on upside and downside). Being known as the fear index, it has more to do with how it behaves when the underlying moves.
Image Source: © Bbbar | Megapixl.com
Generally, when the market moves up, VIX tends to fall and when the market falls, VIX tends to surge. This does not happen all the time, but mostly, VIX moves in the opposite direction of the market. Therefore, when VIX is increasing, it is estimated that investors are fearing a fall. Lower the VIX, the more optimistic the investors are. On the other hand, the higher the VIX, the higher the pessimism is prevailing in the market.
VIX is a complex calculation based on the premiums of options contract of an instrument (generally a broader market index). Changes in demand and supply for these options contracts respectively change their premiums, which consequently affects the value of VIX. It measures 30-day implied volatility (IV) expressed as an annualised move of the market index and can be used for gauging short-term price movements.
Let us see how A-VIX anticipates volatility
A-VIX, which measures the volatility of the benchmark ASX 200, last traded at 13, as of 12 January 2022. The number 13 here means that options premiums are estimating an annualised move of 13%, either on the upside or on the downside. For the short-term estimate, one can divide this number by the square root of 12 (almost 3.46) to arrive at the monthly estimate.
What Is ASX Volatility Index? How Has It Performed In 2022?
Here 13/3.46 = 3.75, meaning, an investor can expect the ASX 200 to move either 3.75% up or down in a month. This year, the A-VIX has surged 22.6% to 13, primarily led by a massive 1-day spike of 23.83% on 6 January 2022, when the ASX 200 fell the most in 16 months, by 2.74% (again, showing an inverse corelation).