Technical Analysis, Studies, Indicators:
VIX, VXN and VXO Volatility Indexes
The VIX (CBOE Volatility Index) is based on the S&P 500 stock index option prices and measures market expectations of near-term volatility. The VIX was introduced in 1993. It is considered to be an indicator of investor mood and market volatility.
The VXN (CBOE NASDAQ Volatility Index) and VXO (CBOE Volatility Index) are other volatility indexes. VXN is based on NASDAQ 100 index (NDX) options.
VXO is based on S&P 100 index (OEX) options. Until 2003, the VIX index calculation was based on the CBOE S&P 100 index (OEX). With the introduction of the new and revised, more robust calculation methodology, the underlying index was changed to the CBOE S&P 500 Index options (SPX). Nevertheless, the CBOE has made a decision to continue base its calculation of the volatility index on the S&P 100 under the new ticker - VXO volatility index.
A high volatility index value indicates increased panic in the stock market. A low volatility index indicates more stability in the market.
Chart 1: VIX, VXN, VXO and S&P 500
Volatility indexes are used in trading systems to trade underlying options and futures (VIX options and futures, S&P 500 options ...) and also as a measurement of market sentiment in trading systems that are based on the index analysis.
In some cases, traders use volatility indexes to analyze the overall sentiment for equity options, instead of the whole stock market. However, the relationship of the VIX/VXN/VXO to equity options often can be overstated because different dynamics drive the volatility of the S&P 500 index options and individual equity options and the two often can be uncorrelated. For instance, technology stocks are usually more volatile than utility stocks and use of the VIX to represent the volatility of stocks in both of these sectors could be overly simplistic.
Chart 2: High VIX and S&P 500 support
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