The VIX, the Chicago Board Options Exchange’s CBOE Volatility Index, is used to measure fear and uncertainty in the stock market. Photo: Shutterstock

The VIX, the Chicago Board Options Exchange’s CBOE Volatility Index, is used to measure fear and uncertainty in the stock market. Photo: Shutterstock

Although stock markets are by nature volatile, the macroeconomic headwinds of 2022 tend to increase their volatility. The so-called “fear index”, which can be tracked via the ticker symbol VIX, has been trending upwards in recent months.

The first half of 2022 will have been marked by the continuation of the covid-19 pandemic, the outbreak of war in Ukraine, bottlenecks in global production following lockdowns in China, rising energy prices, interest rate hikes etc. All of these factors have been of concern to the market and have regularly caused volatility in the financial markets.

Volatility is not a vague concept mentioned regularly by financial commentators, but a precise statistical measure. Whether upward or downward, volatility is measured by the difference in returns of a stock or market index.

Thus, the higher the volatility of a security, the more risky it is. Indeed, the volatility of a security remains linked to the degree of uncertainty, especially if it varies significantly over a short period.

Index fluctuations

Beyond the simple definition, there are indices that can predict market volatility. The best known, the VIX Volatility Index, developed and disseminated in real time by the Chicago Board Options Exchange, measures S&P500 put options based on trading activity over the past 30 days. The higher the VIX, the more turbulent the markets. Hence the term “fear index”.

At the time of writing, the VIX is hovering around 30 and is therefore considered high because it is above 20. When it is between 12 and 20, the VIX is considered normal. Low is below 12.

The VIX has not been close to 12 since December 2019. Indeed, the volatility index has shown some signs of volatility since then. In the midst of the first wave of covid-19 it peaked at 84.83 on 17 March 2020, nearly breaking a record set on 24 October 2008, when the VIX climbed to 89.53. Following its last peak in March 2020, the VIX has consistently ranged from a high of 41.16 to a low of 14.19.

Different investment postures

As stock market volatility spikes, stagflation takes hold in Europe and recession invades the US, investors may be inclined to lose their bearings. Yet some would argue that when the VIX is high, it is time to buy, and when it is low, to sell. The VIX can then be used as a common contrarian market indicator. The VIX is based on a history of put options, which give investors the right (but not the obligation) to sell shares during a specific timeframe at a specific price. Thus, investing in a put option means betting that the value of a stock will fall before the put contract expires.

Volatility is an integral part of markets that rise and fall in the short term. However, investors with long term strategies ignore the fear of large price swings and intense trading in the short term. Some would even describe volatility as “noise”.

Although the VIX is regularly referred to in Europe to comment on activities and the state of the markets, it should be noted that it measures the volatility of the American stock market. However, there is a European equivalent, the VSTOXX, based on the EuroStoxx 50 options traded on the Eurex exchange in Frankfurt. The VSTOXX remains less well known.

Originally published in French by and translated for Delano

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