Volatility indices are essential tools for options traders as they provide valuable insights into the expected price fluctuations of a market or a specific financial instrument. These indices, often referred to as "fear indices", are calculated from the option prices of the respective market and reflect the expectations of market participants regarding future fluctuations. A high volatility index indicates increased market uncertainty and potentially larger price swings, while a low value signals relative stability and smaller fluctuations.
In this blog post, Alexander Eichhorn from Eichhorn Coaching presents the most important volatility indices, which are relevant for both large share indices and individual shares. These indices are crucial for risk assessment, hedging and speculation in various financial markets. They offer investors and traders the opportunity to make informed decisions and hedge against market uncertainties.
What is a volatility index?
A volatility index, often referred to as a "fear index", is a measure of the expected range of fluctuation (volatility) of a specific market or a specific financial instrument over a certain period of time. A volatility index is calculated from the option prices of the respective market.
Characteristics and meaning of a volatility index:
- Measure of market expectations: A volatility index reflects the expectations of market participants with regard to future price fluctuations. It is derived from the prices of options.
- Indicator of uncertainty: A high volatility index indicates increased market uncertainty and potentially larger price swings. A low value signals relative stability and lower fluctuations.
- Hedging and speculation: Investors use volatility indices to hedge against market uncertainties or to speculate on future volatility movements.
- Calculation: The calculation is generally based on option prices. These prices include market participants' expectations regarding future volatility. For example, the VIX is based on the prices of S&P 500 index options.
- Broad applicability: There are various volatility indices for different markets and asset classes, e.g. for equity indices, commodities or currencies.
Example volatility index VIX
The Volatility index of the S&P 500 (VIX) indicates the fluctuation intensity expected by the market for the S&P 500. The VIX is calculated on the basis of option prices with 30 days to maturity on the S&P 500. A high value often indicates a turbulent (falling) market, while lower values indicate a healthy bull market.
Tip: Podcast episode "How can you trade volatility with options?"
The VIX from the CBOE, the Chicago Board Options Exchange. As the best-known volatility index, it is not only very important as a volatility index, but also for predicting market developments. As the VIX index reflects the "mood" of the markets, market participants also know it colloquially as the "fear index". The VIX index is not directly tradable, but there are futures on the volatility index.
There are several volatility indices of the S&P 500 that measure the expected volatility over different time periods. The following table lists the indices with the corresponding time periods:
1 day: VIX1D
1 month: VIX
3 months: VIX3M
6 months: VXMT
1 year: VIX1Y
As the VIX itself cannot be traded, traders have to take a detour via other products in order to profit from the volatility index. Two main product types are used here: Options and Futures.
Volatility indices for the stock market
There is at least one volatility index for each of the major share indices worldwide. The following list shows the most important volatility indices for the stock market:
VXN Nasdaq 100
The VXN measures the expected volatility of the Nasdaq 100, an index comprising mainly technology and growth companies. A high VXN value indicates high expected volatility in this market segment.
RVX Russel 2000
The RVX represents the expected volatility of the Russell 2000, which comprises the 2000 smallest companies in the Russell 3000 Index. These companies are generally more volatile, which tends to be reflected in a higher RVX value.
VXD DJIA
The VXD measures the volatility of the Dow Jones Industrial Average (DJIA), one of the oldest and best-known stock indices in the world. The VXD provides insights into the volatility expectations for the 30 largest and most important US companies.
VDAX New DAX
The VDAX New measures the expected volatility of the DAX, the most important share index in Germany. The VDAX New provides information on market uncertainty and the expected fluctuations of the 50 largest German companies.
VSTOXX EuroStoxx 50
The VSTOXX reflects the volatility expectations for the EuroStoxx 50, an index comprising the 50 largest listed companies in the eurozone. A high VSTOXX value indicates increased market uncertainty in the eurozone.
VXEWZ Brazil
The VXEWZ measures the expected volatility of the MSCI Brazil Index, which tracks the largest and most liquid companies in Brazil. This index is particularly relevant for investors who invest in emerging markets.
VXEEM Emerging Markets
The VXEEM reflects the volatility expectations for the MSCI Emerging Markets Index, which comprises a broad range of companies from emerging markets. A high VXEEM value indicates increased uncertainty and fluctuations in the emerging markets.
Volatility indices for individual stocks:
Volatility indices for individual stocks are specialized indices that measure the expected volatility of a specific stock. These indices provide insights into market sentiment and future price movement expectations for individual companies:
VXAZN Amazon
VXAPL Apple
VXGS Goldman Sachs
VXGOG Google
VXIBM IBM
Volatility indices for commodities
Commodity volatility indices are specialized indices that measure the expected volatility of specific commodity markets. These indices are valuable tools for investors and traders seeking a better understanding of potential price fluctuations in commodity markets such as oil, gold or interest rate products.
1. EVZ (EuroCurrency Volatility Index)
- The ECC measures the expected volatility of the euro against the US dollar. It is based on the prices of options on the EUR/USD exchange rate.
- The ECC provides insights into the expected fluctuations in the foreign exchange market, especially for the euro-dollar currency pair. Currency fluctuations can be influenced by political events, economic data or monetary policy decisions.
2. GVZ (Gold Volatility Index)
- The GVZ measures the expected volatility of gold prices based on the options of the SPDR Gold Shares ETF (GLD).
- Gold is often seen as a safe haven in times of economic uncertainty. The GVZ reflects market sentiment and expectations regarding future price fluctuations in the gold market.
3. the VXGDX (Gold Miners ETF Volatility Index)
- The VXGDX measures the expected volatility of the Gold Miners ETF (GDX), which contains shares of companies active in the gold mining sector.
- The volatility of gold mining shares can differ greatly from that of the gold price, as it is also influenced by company-specific factors and operational risks.
4 VXSLV (Silver Volatility Index)
- The VXSLV measures the expected volatility of silver prices based on the options of the iShares Silver Trust (SLV).
- Silver is used both as an industrial metal and as an investment. The VXSLV reflects market sentiment and expectations regarding future price fluctuations in the silver market.
- The OVX measures the expected 30-day volatility of crude oil prices based on the options of the United States Oil Fund (USO).
- Significance: The crude oil market is strongly influenced by geopolitical events, supply-demand dynamics and economic factors. The OVX provides insights into the expected price fluctuations in the oil market.
6. the VXTLT (Treasury Bond Volatility Index)
- The VXTLT measures the expected volatility of government bonds, in particular based on the options of the iShares 20+ Year Treasury Bond ETF (TLT).
- Government bonds are important indicators of the general economic situation and interest rate trends. The VXTLT reflects market sentiment and expectations regarding future fluctuations in long-term government bonds.
What a pity! Unfortunately, the calculation of some commodity volatility indices has been discontinued; for example, the index for corn (CIV) and wheat (WIV) has no longer been calculated since 2018.
These volatility indices are calculated by options on the commodity ETPs (not futures!)! These volatility indices for commodities make it possible to recognize very quickly whether the implied volatility for a particular commodity market is high or low.
Conclusion - Volatility indices for options traders
Volatility indices are indispensable tools for options traders as they measure the expected range of fluctuation of a market or financial instrument. These indices, often referred to as "fear indices", are calculated from the prices of options and provide valuable insights into market participants' expectations of future price fluctuations. A high volatility index signals increased uncertainty and potentially larger price swings, while a low index value indicates relative stability.
Overall, volatility indices provide valuable insights into market sentiment and expected price fluctuations. They are key instruments for risk assessment, hedging and speculation in various financial markets.
