S&P/ASX 200 VIX

Template:Unreviewed S&P/ASX200 VIX is a real-time index that reflects the market’s expected volatility in the Australian benchmark equity index, the S&P/ASX 200 ASX Code: XVI) is a real-time index that reflects the market’s expected volatility in the Australian benchmark equity index, the S&P/ASX 200.

The index uses real-time bid/ask prices for S&P/ASX 200 (XJO) put and call options to derive a weighted average of the implied volatility being incorporated into the options. Two option maturities are used, with the nearest month at least a week away from expiry. The volatility of the options closest to maturity is interpolated with that of the options farthest from maturity, to arrive at a constant indication of expected volatility in S&P/ASX 200 over the next 30 days.

Uses and interpretation

The volatility index is primarily used as an indicator of investor sentiment and market expectations. A relatively high volatility index value implies that the market expects significant changes in the S&P/ASX 200 over the next 30 days, while a relatively low volatility index value implies that the market expects minimal change. The chart below illustrates this relationship.

Similarly, when the volatility index is at relatively high levels, investor sentiment is perceived to be uncertain. Conversely, when the volatility index is at relatively low levels, it implies greater investor confidence.

Indicators such as the volatility index are often perceived to show characteristics of mean reversion by oscillating around a long-term average (or mean). In other words, a move away from the long-term average towards high or low extremes is usually followed by a move back towards the long-term average.

The implication is that high levels of volatility may be followed by a return to more normal volatility levels, and low levels of volatility may be precursors to an increase in volatility.

The volatility index value is similar to the rate of return volatility. The volatility index is reported as an annualised standard deviation percentage that can be converted to a shorter time period. For instance, a volatility index value of 20% can be converted to a monthly figure, remembering that volatility scales at the square root of time.

The formula is: 20% x √1/12 = 5.77%

In the above example, index options over the S&P/ASX 200 are incorporating the potential for a one standard deviation return over the next month of +/- 5.77%.

More information on volatility index

External links

• S&P/ASX 200 VIX Volatility index