S&P/ASX 200 VIX Index
What is the S&P/ASX 200 VIX Index?
The S&P/ASX 200 VIX is the volatility index. The VIX index (ticker symbol: XVI), measures the 30-day implied volatility of the Australian stock market. This is done by using the middle point of real time bid/ask prices on the S&P/ASX 200 put and call options. This index reflects investor sentiment in regards to the expected volatility of the Australian S&P/ASX 200, Australia’s benchmark index. It is due to this that the S&P/ASX 200 VIX is often refered to as the ‘fear index’.
Uses of the S&P/ASX 200 VIX Index
The S&P/ASX 200 VIX is traded by individual investors through to hedge fund managers. The VIX is widely used to hedge a position by fund managers. It can also be used to arbitrage anticipated volatility. It allows participants to trade anticipated changes in Australian equity market volatility in one single transaction. A volatility index trading at relatively high levels implies market expectation of very large changes either on the up or downside in the S&P/ASX 200. A relatively low VIX value implies a market expectation of very little change. This means the S&P/ASX 200 VIX will generally move inversely to the equity market.
Risks of the S&P/ASX 200 VIX Index
The risks of trading the VIX are quite high. By definition the VIV is a volatility index so trading the index relies on predicting volatility. For this reason, trading the VIX should only be done by experienced traders.