by Dan Passarelli | June 13, 2012 4:18 pm
The latest brainchild to come out of the CBOE has been Equity VIXes, also referred to as “Stock VIXes.” The CBOE has listed volatility indexes, or VIXes, on five equities: Apple (NASDAQ:AAPL) Amazon.com (NASDAQ:AMZN), Goldman Sachs (NYSE:GS), Google (NASDAQ:GOOG) and IBM (NYSE:IBM). These indexes track the implied volatility of each of these individual stocks. To understand why that’s important, let’s take a closer look at implied volatility.
Implied volatility is an abstract, esoteric concept, but it is important to option traders. In plain English, implied volatility is a measure of how cheap or expensive options are. It also provides some insight into the market’s expectations.
Think of option prices like car insurance premiums. When the insurance company perceives a driver to be a high risk, they charge a high premium. When the insurance company perceives the driver to be a low risk, they charge a low premium. This is exactly how option prices work. When the market looks to be more risky in the future, its insurance policies – options — get more expensive. When the market seems like it will be less risky, options get cheaper. This is important for both hedgers and speculators.
This is what these indexes are designed to measure: the cost of options based on expectations for volatility. The new CBOE Stock VIXes offer traders a way to measure the relative cost of options.
Are AMZN options cheaper or more expensive than they were last week? Or last month? To find the answer, take a look at the AMZN Stock VIX.
Here is a list of the ticker symbols of each of the five Stock VIXes:
CBOE Equity VIX® on Apple: ticker VXAPL
CBOE Equity VIX® on Amazon: ticker VXAZN
CBOE Equity VIX® on Goldman Sachs: ticker VXGS
CBOE Equity VIX® on Google: ticker VXGOG
CBOE Equity VIX® on IBM: ticker VXIBM
To be fair, this information was somewhat available in the past. Savvy option traders are in the habit of studying “implied volatility charts” when evaluating options. A volatility chart graphically displays implied volatility data on a chart so traders can compare current levels to levels in the past, and compare the implied volatility of one equity to another. These charts have been used by traders for a long time.
That begs the question: If this information has already been in place, why do we need Stock VIXes? Here’s what I think is the real story.
There is some chatter — and I’m inclined to believe it — that the reason these indexes were created is so that one day soon they can list options on these indexes. That would give hedgers a whole new set of tools to protect against volatility, and it would give traders better access to a whole new asset class to trade. We’ve seen this before with the (original) VIX, which is the volatility index for the S&P 500. It had the VIX listed on it for a long time, then options and futures were created to trade it.
Whether traders are able to trade options on these indexes or not, they provide valuable information. Now with these indexes being published and widely disseminated, they are ubiquitous and can be studied by any trader with access to simple stock charts. This is one new vehicle traders won’t want to ignore.
Source URL: http://investorplace.com/2012/06/5-popular-stocks-get-the-vix-treatment/
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