Is The Volatility Index Actually Useful In Measuring Volatility?

is the volatility index actually useful in measuring volatility

The volatility index, also known as the “fear index,” is intended to measure the implied forward 30-day volatility of the market by using at-the-money put and call option prices for certain stocks. But this begs an important question: how accurate is the index?

What To Know

The volatility index is not designed to measure fear in the market — it’s designed to “measure the amount of option premiums people are willing to pay,” Jeff Kilburg of KKM Financial said during a CNBC interview Thursday. It’s not designed to quantify the level of concern investors have with external potential disruptive events, like trade wars and tariffs, Kilburg said.

Case in point: the volatility index is trading near a 10-year low, which at first glance implies the market risk is similarly at a 10-year low. The answer is simply no, Kilburg said.

Why it’s Important

“I think it is a stark contrast,” Kilburg said of the VIX versus actual market risk. “It’s a suppression in the Volatility Index, or the suppression in option premiums due to the fact central banks continue to be in the cycle that ‘yes, we are moving toward quantitative tightening,’ but at the end of the day they have not really walked away from that support.”

Price Action

The volatility index hit its lowest level in around seven years Wednesday and was trading lower by nearly 1 percent Thursday morning.

Related Links:

An Overlooked Loser In The Trade War: The VIX

5 Best ETFs Of The First Half: Volatility, Internet Names Rule

See more from Benzinga

© 2018 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.

Read on The Source

Author: HEDGE

Hedge Accordingly was founded ahead of the global financial crisis in January of 2008, with the goal of providing our readers our unique take on The Latest News on Wall Street, Stocks, #Politics and Business news. Hedge Accordingly produces both original, and aggregated #Wallst news content from top publishers around the world. We curate aggregated content covering the latest news on politics, stocks, wall street, and the tech industry. We also provide free stock charting, quotes and a bitcoin, forex and currency exchange. Learn More About HEDGEaccordingly.com