What is the vix and how does it work?: Yahoo Finance explains

Yahoo Finance’s Brian Cheung explains what the vix, how it is calculated and why it is important.

Dogs are at record highs but there’s been some market swings to get there right now the vix is trading at its lowest level this year well off its 52-week high of thirty six thirty six point zero seven showing investors they’re a little bit more calm as we head toward 2020 but what exactly is the vix how does it measure fear on wall street it’s time for yahoo you

Brian chung is here with this week’s lesson alright well class is in session you may have heard of it before it’s called volatility and at a high level what it means is a tendency to change rapidly and unpredictably in financial markets this can be a key characteristic to describe movements in a securities price now here’s an example so we have a 3-month chart here

Of two stocks walmart which is the purple line and procter & gamble which is the blue line now keep mind the snapshot was taken some time ago so the prices have moved since then but as of the time that this was taken the two stocks were trading pretty close in terms of movement over the three months somewhere between two and three percent but if you look at png

Again the blue line it’s been a rocky road to get where it’s at right now so in mid-october the stock was down as much as 4% and in the end of october it was as high as almost three percent so png might what might be what you call more volatile in this case and in the early 90s the cpoe tried to come up with a way to quantify volatility in the overall market not

Just with these single equities and they call it the vix or sometimes coke we referred to as the fear index and here is exactly how it’s calculated i’m gonna and i’m just kidding i’m actually gonna walk through all this is a lot of crazy greek letters here what it actually is is its measuring expected volatility based on the s&p 500 so why expected volatility

Well because investors always want to know what expected returns are and how does the cboe actually measure expected volatility though well it uses near-term option prices on a wide variety of security so bear with me but options are a whole separate topics and what you need to know is that really it’s a derivative that allows you to buy or sell an underlying

Asset at a predetermined price over a certain period of time so people’s expectations for volatility in the future is baked into the calls and puts in these options trades so let’s actually take a look at the vix over the last 12 months in that case so let me switch to the real quick and again this is the vix so as we mentioned is that it’s at a twelve handle

Right now the highest level of volatility we actually saw over the past year was in december of last year the 36 handle actually 3607 was the high over the last 52 weeks and the market as you might recall during that time was selling off a mid trade concerns and worries that the fed may have made a policy mistake by raising rates of forth time for the year now by

Large investors were concerned that the us economy was close to nearing the end of the cycle now you notice that things were calm through the first half of the year through january february march april we actually saw pretty close to the levels that we’re seeing right now at around a 12 handle but in august you actually saw that a flattening yield curve and then

An inverted yield curve actually pushed the vix up to a new level between 20 and 25 now again the vix it’s right now today at just over a 12 handle as trade concerns have eased amid a phase one trade deal that is the lowest this year levels that we haven’t seen again since the spring now something really cool about the vix is that there’s actually levels so let me

Show you this right here this is the v vix the cboe vix volatility index now this measures the volatility of the volatility that i just showed you so just like how the vix uses options to figure out expected volatility and equities the vix measures vix options to measure expected volatility and well volatility are you following this okay well so here’s how it works

If v vix is low then expectations are for volatility or fear to also be low so you remember in the spring it appeared to be the lowest volatility as measured by the regular vix well that actually lines up with the regular fix right pretty low levels at almost just about 80 but that doesn’t line up actually currently right now wait we’ve actually seen an uptrend in

The vix i mean although not at necessarily the highs of the year but a trend up despite the fact that we’re at a all-time low on the regular vix so one possible interpretation it’s telling us that while underlying volatility is low it may not be for longer for right now and this is where i stop guys because if we go any deeper maybe there’s a vv vix a derivative of

Derivative of a derivative but we’ll break that down there are also leveraged vix vehicles so we won’t get into that hey investors sack guzman here are you interested in learning more about the markets and getting the latest financial news well then click right here to subscribe to our yahoo finance youtube channel get the latest up-to-the-minute market analysis

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What is the vix and how does it work?: Yahoo Finance explains By Yahoo Finance