Intro to Options - The VIX:

Lesson The VIX and Why Volatility Matters

Bing bang boom, we're back.

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If you are one of the many new subscribers - welcome. If you have been with us since way back - you a G for real. Regardless, welcome back to our Weekly Lesson Wednesday options series.

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Today, we are giving a simple intro to the VIX. I was going to chat about the Greeks, but I figured this would give more context and is more relevant with the VIX at a 4-year low (we covered this on our Monday Market Open, just a little FYI).

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So, what the hell is the VIX? (simply)

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The VIX is an index that measures stock market volatility (on the S&P 500). The VIX index is run by the CBOE - Chicago Board Options Exchange and is a 30-day “forward-looking” index. Some people call it the “fear index” - although, my portfolio is scarier.

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How can it be forward-looking? Good question. Because the VIX is calculated by using option contracts (on the S&P 500) that are dated roughly 30 days out, they can see what people are buying.

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Essentially - they are able to measure what investors are implying by what they are buying. If your boys loaded up on rubbers before the Columbia trip - that implies something (may not happen though).

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Same way that if investors think the market is going to be choppy (“volatile”) over the next month, they will buy options to “hedge” their risk or capitalize on an upside.

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When the gap between what price buyers are willing to pay and what price sellers are willing to sell increases - so does disagreement on what the “price should be” - which represents greater uncertainty - aka volatility.

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If you are curious how the VIX is calculated, I found this helpful.

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*By the way, the VIX is mostly between 0 - 30. Anything above 30 means its gettin’ choppy.

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Summary:

• The VIX measures uncertainty (volatility) based on what investors are buying - puts/calls.
• The VIX intends to show volatility over the next month.
• The VIX is typically in a range of 0 - 30.

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