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In September 2003 the CBOE changed the way the VIX is
calculated. The new VIX is derived from the prices of all near-term
at-the-money SPX puts and calls and out-of-the-money puts and calls.
Deep-in-the-money options are excluded. This methodology is also used to calculate
the Nasdaq 100 (NDX) volatility index (symbol: VXN).
The old VIX is still avaliable but is now has the symbol VOX. It still uses
the old calculation method, which uses the Black-Scholes pricing model. The VOX is
calculated by taking the weighted average of the implied volatility of 8 OEX
calls and puts with an average time to expiration of 30 days.
The VIX (and VOX and VXN) measures fear and optimism as
manifested in options activity. When large numbers of traders become
fearful, the VIX reading rises, and when complacency about the market reigns,
the VIX reading falls. And since the vast majority of put/call buyers are
wrong and lose money, it's usually a smart move to fade (go counter to) what
the VIX says the the crowd is doing.
The VIX is an INVERSE indicator, which means
that high readings are oversold (excess of bearishness) and low readings
are overbought (excess of bullishness). Because of this Decision Point displays
the VIX chart with an inverted scale to make its interpretation more intuitive
-- overbought readings show at the top of the chart and vice versa.
Raw VIX numbers are of limited value. The
VIX indicator is most useful when used in combination with some type of overlay,
and preferably one that employs channels or bands. Some technicians use Bollinger
Bands for this purpose, others use a short term (3 months or so) linear
regression channel or percent bands. When used in this fashion, it is the
VIX position within the channel that's important, rather than the raw number
The CBOE calculated severals years history of closing values for the VIX. That
data was not live and doesn't have an open, high, or low associated with it. Those
days will display as dots on the daily chart. The same is true for the VXN, which
is only a few years older than the new VIX.
More detailed information about the VIX is