What is a volatility index? What effects it, when should you invest in it, etc.?

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What is a volatility index? What effects it, when should you invest in it, etc.?

In: Economics
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The VIX is a proxy for the market expectations of volatility, i.e. how much the market participants expect the S&P 500 to change in the near-term.

It is constructed using the implied volatility of a set of options on the S&P 500. What is implied volatility? The Black-Scholes model for pricing options has several variables such as the interest rate, price of the underlying, or the volatility. With the exception of volatility all variables can be observed (e.g. prices) or have a reasonable proxy (e.g. interest rate). But observing prices for options you can solve the Black-Scholes model for the volatility.

When you should invest in it? If you have to ask on reddit what a volatility index is, the answer is that you should not invest in it.