The Importance Of The VIX

  • October 12, 1999
  • Bob Pisani

I recently received the following e-mail from a subscriber:

“On Oct. 5, when the S&P was around 1300, I bought some OEX Nov. 740 calls for 3 1/4. Today, Oct. 8, the S&P cash has increased nicely to up around 1336, but the bid on my 740 calls is only 2 5/8. What happened?”

The first thing to notice is that these are OEX calls, which are not directly linked to the S&P. But more on that later. Let’s look at the OEX and S&P quotes for the two days in question, and also include the VIX, which is the implied volatility of the OEX at-the-money (ATM) options:






Index 10/5 10/8
OEX Close 682.91 689.74
S&P Close 1301.35 1336.02
VIX Close 26.07 21.20
Between 10/5 and 10/8, the VIX declined about 20%. Thus, ATM option premiums fell. Of course, a Nov. 740 is not an ATM but an out-of-the-money ( OOTM) option, but if the ATM premiums fall you can also expect the OOTM premiums to fall.

There are various factors than can affect an option position’s outcome. One of these factors is the implied volatility, which measures the option premium relative to the underlying and can change dramatically over the short term. Figure 1 shows is a daily chart of the VIX close since July.



Figure 1.   CBOE volatility index (VIX), daily.   Source: TradeStation by Omega Research.

The VIX hit a high of 32.12 on August 5, declined to 22.66 on August 26, hit another high of 32.33 on September 24, and then declined to close at 21.20 on October 8. Thus, option premiums show considerable variability independent of the volatility of the OEX itself. This variability must be taken into account, especially if you do not hedge it by taking a spread position designed for that purpose.

Additionally, the S&P and the OEX do not track each other precisely. More on this on Thursday, October 14.