Volatility measures the frequency and magnitude of price movements, both up and down, that a financial instrument experiences over a certain period of time. The more dramatic the price swings in that instrument, the higher the level of volatility. Volatility can be measured using actual historical price changes (realized volatility) or it can be a measure of expected future volatility that is implied by option prices.
The CBOE VIX Index is a measure of expected future volatility.
The VIX was the first benchmark index to measure the market’s expectation of future volatility.
The VIX Index is based on options of the S&P 500® Index, considered the leading indicator of the broad U.S. stock market.
The VIX Index is recognized as the world’s premier gauge of U.S. equity market volatility. The VIX Index estimates expected volatility by aggregating the weighted prices of S&P 500 Index (SPX) puts and calls over a wide range of strike prices. Specifically, the prices used to calculate VIX Index values are midpoints of real-time SPX option bid/ask price quotations.
Looking at the big picture, the VIX has remained above its long-term average of 20 for most of 2022.
He's a monthly chart of the VIX going back 30 years for a visual of the volatility expansion.
Zooming in for a closer look at the last 5 years, here is a chart with weekly data points. While implied volatility has been elevated this year, it still hasn't spiked like it did in March 2020.
Getting even more granular, looking at the past year with daily data points, we see the volatility expansion has remained elevated, but it has also cycled in a range. The range has remained on the upper end.
A VIX of 25 tells us the options market is pricing in an implied, or expected, volatility of around 1.6% daily price range over the next 30 days.
So, when you see a stock index trend up or down around 1.6%, it's expected to.
But if the S&P 500 (SPX) moves more than 1.6%, then prices are spreading out more than expected.
By and large, the stock market has been in a volatility expansion for most of the year, so we should expect to see prices spread out.
Bear markets are littered with waterfall declines and face-ripping rallies — so they should surprise no one.
If you need help managing volatility, get in touch!
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