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