The concept of volatility as a separate asset class has become increasingly prevalent in the industry. Market volatility is now a key component of financial news, especially in times of crisis. Financial market turmoil is often a sign of resurgence of volatility.
First, some terminology. When we talk about volatility, we have to differentiate carefully the two types of volatility, which have different risk/reward characteristics. Historical volatility represents the price volatility of an underlying security during trading sessions over a certain period of time. Then, implied volatility is derived from the real-time price of an option in the market. For investors, implied volatility is a useful indicator as it corresponds to the volatility anticipated by market participants for the life of the option and reflects in the option premium.
Note that the higher the implied volatility, the higher the premium, and conversely. Thus, an investor could compare the implied volatility with the historical volatility of the underlying asset and make his own opinion of the upcoming volatility in order to help him implement an options strategy that he finds optimal.
The S&P/TSX 60 VIX® (ticker: VIXC)
VIXC is a volatility index that measures the market expectations of the 30-day volatility of the S&P/TSX 60 index implied by the price of near-term options on the S&P/TSX 60 (SXO options).
As the S&P/TSX 60 index is the equity benchmark in Canada, VIXC is a good proxy of investor sentiment for the Canadian equity market. The higher the index, the higher the risk of market turmoil. A rising index therefore reflects the heightened fears of investors for the coming month. VIXC also gives an indication of whether options are relatively cheap or expensive, as the higher the implied volatility, the higher premiums become and the more nervous is the market. On the other hand, the lower the implied volatility, the lower premiums are and the more confident is the market.
You want to know more on VIXC (data, FAQ, methodology), visit our Web page at http://m-x.ca/indicesmx_vixc_en.php.