The CBOE NASDAQ Volatility Index (VXN) is a measure of market expectations of near-term volatility conveyed by NASDAQ-100 Index (NDX) options prices. It measures the market expectation of 30-day volatility based on the NASDAQ-100 options. The CBOE is the only organization responsible for the calculation and dissemination of the VXN based on the index.
The CBOE developed the VXN due to the vast difference in volatility between the NASDAQ-100 and the S&P 500. In early 1999, the NASDAQ index skyrocketed 137% to 5,132 but fell by 50% to around 2,500 by the end of 2000.
Whereas, the S&P 500 only moved up 26% to peak at 2,000 and then declined by 15% by the end of 2000. Neither NASDAQ nor any of its partners and affiliates have anything to do with the calculation and dissemination of the index. It uses the Black-Scholes Model of option pricing.
The CBOE VXN is a leading gauge of market volatility relating to the NASDAQ-100 index. It is based on the prices of a NASDAQ 100 option prices with 30 days to expiration.
The index was made by the Chicago Board Options Exchange (CBOE) in 2001. The CBOE calculates and disseminates the value of the index continuously during trading hours.
It is calculated just like the VIX, the better-known index of the CBOE used for gauging market volatility of the S&P 500.
What is the Chicago Board Options Exchange (CBOE)?
The CBOE is one of the world’s biggest markets for options that deal in interest rates, equities, and indexes. It became a publicly traded corporation in 2010 and now goes by the name of CBOE Global Markets Inc. It is well known for the Volatility Index (VIX), which is a barometer of equity volatility of the S&P 500 Index (SPX).
The CBOE is the second-largest options market in the world, just behind the Korea Stock Exchange (KSE). It transacts approximately 300 million contracts per year.
What is the NASDAQ-100 Index?
The NASDAQ-100 Index is a stock market index consisting of 100 companies listed on the Nasdaq Stock Market. The companies that make up the NASDAQ-100 are characterized by high market capitalizations.
It is important to note that there are companies from various industries on the index except for the financial industry. Apple, Amazon, Adobe, Marriott, and Intel are examples of companies on the index.
What is the Black-Scholes Model?
The Black-Scholes Model is a mathematical model for pricing options in the stock market. The various factors taken into consideration under the model are strike price, the underlying asset’s price, the standard deviation of the asset’s return, and the time until the expiration date. Being a mathematical model, it comes with a few assumptions, such as:
The option will provide a risk-free return.
The option can only be exercised on the date of expiration.
The volatility of the underlying asset will remain constant throughout the life of the asset.
The CBOE VXN is presented in percentage points, and its value is continuously ticking during trading hours.
Interpreting the VXN
For investors who are already accustomed to option indexes, the CBOE’S VXN is based on the same concept of the better known VIX. Even the interpretation of the two indexes is the same.
High values indicate a high degree of fear, and low values indicate a lack of fear. In other words, the higher the index, the greater the volatility to be expected and is usually a buy signal. A falling VXN value means lower volatility and signifies a complacent market. However, many critics say that the usefulness of the index is overrated.
The VXN is used as a contrarian indicator to help inform investor’s trading decisions for technology stocks, as the NASDAQ is made up of many technology giants. It is also because the NASDAQ-100 does not include companies from the financial industry.
For a better perspective, the extreme low readings on the VXN are usually below 15 points. On the other hand, extremely high values are above 35 and reveal a high level of uncertainty. High levels are typically a good time to buy, and low levels are typically a good time to sell.
CFI offers the Commercial Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below: