The S&P/ASX 200 VIX
The S&P/ASX 200 VIX (ASX Code: XVI) is an end-of-day index that reflects the market’s expected volatility in the Australian benchmark equity index, the S&P/ASX 200.
The settlement prices for S&P/ASX 200 (XJO) put and call options are used to derive a weighted average of the implied volatility being incorporated into the options. Two maturities are used with the nearby having at least a week until expiry. The volatility of the options closest to maturity is interpolated with that of the options farthest from maturity to arrive at a constant 30 day indication of expected volatility in S&P/ASX 200.1
Uses and interpretation
The volatility index is primarily used as an indicator of investor sentiment and market expectations. A volatility index at relatively high levels implies a market expectation of very large changes in the S&P/ASX 200 over the next 30 days while a relatively low volatility index value implies a market expectation of very little change. Similarly, when the volatility index is at relatively high levels, and market expectation is for high levels of volatility, investor sentiment is perceived to be uncertain. Conversely, when the volatility index is at relatively low levels, market expectation is for low levels of volatility which implies greater levels of investor confidence. Volatility indicators such as the volatility index are often perceived to exhibit 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 of mean reversion is that high levels of volatility may be followed by a return to more normal levels of volatility and very low levels of volatility may be pre-cursors to an increase in volatility. The volatility index value is similar to rate of return volatility with the volatility index 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 to do this 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 can be found at
www.asx.com.au/volatilityindex
The VIX® — CBOE Volatility Index methodology is the property of the Chicago Board Options Exchange (‘CBOE’). CBOE has granted Standard & Poor’s Financial Services LLC (‘S&P’), a license to use such methodology to create the S&P/ ASX 200 VIX Index. S&P has granted ASX Ltd a license to use and distribute the S&P/ASX 200 VIX Index, with the permission of CBOE.
ASX Disclaimer: Information provided is for educational purposes and does not constitute financial product advice. You should obtain independent advice from an Australian financial services licensee before making any financial decisions. Although ASX Limited ABN 98 008 624 691 and its related bodies corporate (‘ASX’) has made every effort to ensure the accuracy of the information as at the date of publication, ASX does not give any warranty or representation as the accuracy, reliability or completeness of the information. To the extent permitted by law, ASX and its employees, officers and contractors shall not be liable for any loss or damage arising in any way (including by way of negligence) from or in connection with any information provided or omitted or from any one acting or refraining to act in reliance on this information.
S&P Disclaimer: Reproduction of any information obtained from S&P or the S&P/ASX 200 VIX in any form is prohibited except with the written permission of S&P. S&P does not guarantee the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. THERE ARE NO EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. All information provided by Standard & Poor’s is impersonal and not tailored to the needs of any person, entity or group of persons. Standard & Poor’s and its affiliates do not sponsor, endorse, sell, promote or manage any investment fund or other vehicle that is offered by third parties and that seeks to provide an investment return based on the returns of any Standard & Poor’s index. Individual investors should rely on their own judgment and/or the judgment of their personal financial advisor in making any investment decisions. In no event shall S&P be liable for any damages, including but not limited to direct, special or consequential damages, in connections with the use of S&P/ASX 200 VIX. S&P and STANDARD & POOR’S are registered trademarks of Standard & Poor’s Financial Services LLC.