What is the VIX, the index that reflects the “fear” of global investors

Its technical name is Chicago Board Options Exchange Market Volatily Index. In the jargon of stock analysts and traders it is called the VIX index. And in basic Spanish the translation would be: volatility index of the Chicago put options market.

Created in 1993, for more than 25 years it has been an indicator that is permanently consulted by those who operate with financial instruments. But it had never achieved the public significance it took in recent weeks, when the coronavirus pandemic began to have a strong impact on stock markets around the world and on key prices for operators, such as oil and others. commodities, which collapsed.

The importance of the VIX is that, in a way, it allows us to glimpse the vision of investors forward.

Built on the 30-day S&P 500 Index options, “the index teaches what investors expect, not what they have seen so far, making it a perfect thermometer to see how they feel about the near future. It is known as the indicator of fear, “summarizes Lucas Croce, financial investment advisor.

Questions and answers

To understand how the VIX is made, you have to review what “options” are in the stock market.

Calls. They are asset purchase options that function as a “signal”. An investor pays a premium to secure the right to acquire a certain volume of the asset on a certain date, as long as the price of the asset, at that time, is equal to or less than the so-called “exercise” price.

For example: someone takes a call to make sure to buy soybeans, in June, with a hypothetical price of $ 350.

At that date, the “password” is only executed if the value is equal to or less than that figure.

Puts. They are asset sales options that function as “insurance”. An investor sells his asset in the future paying a premium which guarantees that if that asset is worth less on the date of sale, he will obtain the same price initially determined.

For the same example of soybeans, it is the possibility of a producer to hedge against a possible drop in the price in future months.

So the puts they go up when the markets go down.

Results

In summary, then, what the VIX index measures is the interaction between calls Y puts.

When put options are far superior to call options, it means investors are wary of the future and volatility deepens. That is what happened in the past few weeks.

“In times of normal volatility, the VIX moves between 10 and 15. When it is above 20, it is already considered that there is fear in the market, because it means that there are many operations in the market of puts, covering itself against potential losses. Do you know how much it got last week? A 85. I mean, total panic, “describes Croce.

With the rebound shown by the New York Stock Exchange in the last hours, the VIX was trading at 56.5 points at midday on Tuesday.

“It is better than 85, but still well above 20. It is a sign that volatility in the market and fear are still far from dissipating. Until we have an index of at least 30, there is no certain possibility and concrete of a sustainable rebound that will lead large investors to put money on the market, “adds the Cordovan analyst.