What Does a Vix Index Measure?
If you’ve stumbled across the word “vix”, you’re almost certainly looking at something related to the vix indices. These indices measure the expected volatility for a given index over a 30 day period. The measurements are forward looking. Meaning to say, they make projections for the future rather than an analysis of the past, and they measure put and call options.
Vix Indices and Options
Options, in case you are unfamiliar with the term, are a special type of financial instrument that give buyers the right, but not obligation, to buy or sell assets at specified points in the future for a predetermined price. With options, investors basically try to predict whether prices will rise or fall for a given stock or other type of financial asset.
VIX indices thus look at the “bets” investors are placing and try to project market volatility based on these bets. Volatility is a very important concept for investors because it correlates with the amount of risk and reward in a given market.
Looking at options allows investors to get a sort of pulse on how other investors believe markets and stocks will perform in the weeks ahead. Of course, predicting the future is pretty much impossible. So you need to be careful and make sure you use Vix indices as only one of many tools when conducting an analysis. Definitely don’t make investments solely based on these measure!
3 Indices of Vix
A vix index can refer to any one of three indices:
- the VIX, which refers to the S&P 500 index,
- the VIXD which is tied to the Dow Jones Industrial Average (DJIA) and
- the VIXN, which is pegged to the NASDAQ.
The Chicago Board Options Exchange runs the volatility index.
While VIX indices are generally used to provide analysis and insight into markets, you can actually make investments based on them. A VIX exchange traded fund, or vix etf, is a type of fund that is directly tied to volatility. This allows you to invest directly in volatility. You could also consider vix futures, which are futures tied to the vix indices.
Investing in Volatility
As an investor it is very important for you to consider volatility when making investments. When it comes to investing, higher risks means the higher potential for rewards, so high volatility isn’t necessarily a bad thing. Indeed, high volatility can mean a lot of money for investors who make the right investments.
Of course, risks are higher, so the chances of you losing money will increase as volatility does. Generally speaking, most professionals recommend investors adopt a mixed risk portfolio that includes some high risk and some low risk stocks.
Risk Capital for Volatility
It is also advisable that you only invest risk capital in markets that are very volatile. Risk capital refers to money that you can afford to lose. Since risks will be higher in volatile markets, you don’t want to invest money that you absolutely need because you may end up losing it all.
Of course, individual investor strategies can vary quite a lot. Some investors, for example, shun high risks and focus on lower risk investments. Their returns might not ultimately be as high, but such investors get to enjoy a higher peace of mind.
On the other hand, some investors invest almost solely in high risk investments. Perhaps they enjoy the thrill of it, or maybe they have been enjoying a long and sustained streak of good investments and are feeling confident that they have markets figured out.
Either way and pretty much no matter what your strategy is, a Vix Index can provide a lot of insight for any investor. So make sure you consider them when you are making an investment or formulating your investment strategy.