money sectionmoney sectionIn 1993, the Chicago Board Options Exchange created the Volatility Index, or VIX, as a way to quantify a nebulous concept in options trading: expected future volatility, or the amount of uncertainty within the stock market. Its reputation as a "fear index" means that changes in the VIX are often misinterpreted in the media. To get the most out of the VIX, investors must understand what it is, and more importantly, what it is not.
Implied volatility is the measure of a security's predicted volatility calculated from the option contract prices on that security. Implied volatility can be compared to historic volatility to determine if the options market is predicting a different level price volatility for the underlying security. Implied volatility can be used to determine if options are overpriced or underpriced.
Implied volatility is a term pertinent to all options. Common investors who make no use of options don't need to worry about implied volatility. For those who do employ options, however, it can be a powerful tool for helping determine which options to buy and sell.
The Chicago Board of Trade (CBOT) is a derivatives trading market place. CBOT is one of four designated contract markets of the CME Group. The CBOT was merged into the CME in 2007. The CBOT is a market for the electronic and floor trading of grain futures, equity index futures and interest rate futures. The market also facilitates option trading on many of the listed futures.
Bulletin Board stocks are traded on the Over The Counter (OTC:BB) market. The market is managed by the NASD, and it is separate and distinct from the NASDAQ. Bulletin Board stocks are characterized by their stock symbol, either four or five letters, followed by the designator, ".OB". Bulletin Board stocks do not meet the various listing requirements of the broader exchanges and therefore pose a greater investment risk due to volatility, lack of liquidity, and larger Bid-Ask spreads.
The Volatility Index, also known as the VIX, is an index used to measure the volatility in the major stock market indices. What does the VIX tell us? When should you pay closest attention to the VIX?
