CBOE Volatility Index
®
Often traders look to the implied volatility of the market as a whole for
guidance on the IV of individual stocks. Traders use the Chicago Board
Options Exchange (CBOE) Volatility Index® , or VIX® , as an indicator of
overall market volatility.
When people talk about the market, they are talking about a broad-based
index covering many stocks on many diverse industries. Usually, they are
referring to the S&P 500. Just as the IV of a stock may offer insight about
investors’ feelings about that stock’s future volatility, the volatility of
options on the S&P 500—SPX options—may tell something about the
expected volatility of the market as a whole.
VIX is an index published by the Chicago Board Options Exchange that
measures the IV of a hypothetical 30-day option on the SPX. A 30-day
option on the SPX only truly exists once a month—30 days before
expiration. CBOE computes a hypothetical 30-day option by means of a
weighted average of the two nearest-term months.
When the S&P 500 rises or falls, it is common to see individual stocks
rise and fall in sympathy with the index. Most stocks have some degree of
market risk. When there is a perception of higher risk in the market as a
whole, there can consequently be a perception of higher risk in individual
stocks. The rise or fall of the IV of SPX can translate into the IV of
individual stocks rising or falling.