10/07/10 The VIX

The chart above is 5 years of VIX pricing. For those of you who are new this blog or forgot what you have read or have been living under a rock, VIX, "is the ticker symbol for the Chicago Board Options Exchange Market Volatility Index, a popular measure of the implied volatility of S&P 500 index options. Often referred to as the fear index or the fear gauge, it represents one measure of the market's expectation of stock market volatility over the next 30 day period. The VIX Index was introduced by Prof. Robert Whaley of Vanderbilt University in 1993." (VIX - Wikipedia). Tells you a lot doesn't it! Anyway, VIX measure the pricing of perceived risk in the stock market. Perceived Risk you may ask....... It is the pricing of actual risk if things go wrong or the fear of the nervous nellies of nothing goes wrong. What to do?

Not matter how you look at it the VIX is at the low end of its range. That does not mean that there is no risk, it just means that market participants do not see so much risk that they are willing to pay for it. Supply and demand. There are too few buyers of risk so the price of risk goes down. This is also called Systematic Risk. Systematic Risk is general or total system, read Market, risk. Systematic Risk is non specific. Hence the term, Specific Risk.

Now to the point, Specific Risk is risk related to something....... Specific! Like a sector, asset class or individual investment. While the VIX reflects the overall Market, there really is not one easily available indicator of Specific Risk. If we were big time institutional investors we would have access to the good stuff of Wall Street. The little folk just have to rough it. Anyway, as has been said, "To Much Information can be a bad thing" - a.k.a the TMI Anxiety Complex.

Individual stocks have their own volatility but getting a quote is next to impossible. As has been previously written volatility is a key component to the pricing of options. Misters Black and Sholes options model, aptly named the "Black Sholes" options pricing model used volatility plus the appropriate short term interest/carry rate and e to price options. Replicating the model is a fun Saturday night activity and highly recommended for a wholesome activity for you and that special someone you are courting. Short of that we are at the mercy of the pricing available from our local stock broker.

Back on point individual stock volatility has a tendency to follow that of the overall market and VIX is represents the market. Add a little here for more demand or subtract some for less demand and you have specific stock volatility pricing. Again back to our old friend supply and demand. Some stocks tend to be more robust in volatility pricing and those are the ones we like best. As with anything fashionable this pricing can be transient so we are constantly looking at new stocks, reviewing old stocks and repricing existing stocks for changes in options pricing.

The lesson, keep searching, checking, and reviewing form new opportunity.