INVESTING EXPLAINED: CBOE Volatility Index - Investing Explained
In this series, we bust the jargon and explain a popular investing term or theme. Here it's the Chicago Board Options Exchange Volatility Index.
Not another acronym...
'Fraid so. The CBOE (Chicago Board Options Exchange) Volatility index is also called the VIX, or the Fear Gauge, as it acts as a barometer of investor confidence.
This closely-watched index aims to track the expected volatility of the US S&P 500 index, based on data from option contracts. There are two types of option. A 'call' which gives the holder the right to buy a share (or other asset) at a set price in the future, and 'a put' which gives the right to sell.
Who invented it?
The VIX was launched in 1993. Its cornerstone was research carried out in the 1980s by two academics who are now professors of economics, Menachem Brenner and Dan Galai. The latter, who argues that investors do not properly understand risk, says the VIX is useful because it 'gives you an indication of the perception of risk in the marketplace'. The CBOE now also provides the VVIX, a measure of the VIX's volatility.
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