With the crazy volatility in the markets currently, I’m trying to understand how the VIX gets its value? Is it short term SPY option volume? The equation in the white paper is way over my head and am looking for some **layman’s** explanation!
Thanks!
In: Economics
What I can definitely tell you (I have a Masters in Finance) is that this is not for an ELI5. The underlying model is a seminal paper on option valuation and requires some pretty powerful math and statistics.
At the simplest level, when there is a sufficiently liquid options trading on an underlying stock, you can calculate something called an implied volatility (what the prices of the stock and options indicate as the expectation of future stock price volatility). Collating the data from a variety of securities (ie an index) and putting it into another model gives some indication of the volatility of the index itself.
Then someone decided to make this volatility measure into a derivative (basically a contract that pays off depending on the changes to the volatility measure) which can be bought and sold. Suffice to say you can treat this as “just another moving number” on a screen with the idea that this number rises when larger movements in stock prices are expected and this number falls when the market expects stock prices not to change as much.
Generally: Not for beginners in investing.
Can someone explain the question LI5?
On a related note, can anyone explain like I’m 5 why the major stock markets are still trading in the middle of a global pandemic? You can’t spend it if you’re dead, and people can’t manufacture supplies if the factories are shuttered because of share price crashes.
Latest Answers