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Volatility Index Volatility Index

Volatility Index brought to you by Bulls and the Bears.

The volatility Index indices measure the implied volatility for a basket of put and call options related to a specific index or ETF. The most popular is the CBOE Volatility Index ($VIX), which measures the implied volatility for a basket of out-of-the-money put and call options for the S&P 500. Specifically, the VIX is designed to measure the expected 30-day volatility for the S&P 500. The Chicago Board Options Exchange (CBOE) calculates volatility indices for a number of different ETFs and indices. These include the Gold SPDR, the USO Oil Fund, the Euro Currency Trust, the Dow Industrials, the S&P 500 and the Nasdaq 100. This article will focus on using the VIX. Chartists can use the VIX and other volatility indices to measure sentiment and look for sentiment extremes that can foreshadow reversals.



extremes can be identified when the VIX trades within a range or spikes. As noted in the chart above, the CBOE Volatility Index traded within a well-defined range from July 2007 until October 2008. Moves to the upper end of this range (30-32) signaled excessive bearishness that foreshadowed bullish reversals. Moves to the lower end (16-18) signaled excessive bullishness that foreshadowed bearish reversals. The green dotted lines on the chart below show moves above 30, while the red dotted lines mark moves below 18. There were four bearish extremes and two bullish extremes over a 10 month period. Although not perfect, moves to these extremes were pretty effective in anticipating reversals in the S&P 500

Volatility Index

Volatility Index