The Chicago Board Option Exchange (CBOE)
has long maintained an index of volatility of equities, indicating the rate at
which their prices are expected to move now relative to other periods.
Volatility is important for trading – if the price of a share or a commodity,
or the exchange rate of a currency pair, is not rising and falling, then there
will be no opportunities for those who buy and sell to turn a profit. Extreme
short term bi-directional volatility can be a problem, of course, as it can
lead to the repeated taking out of stop loss orders.
The VIX index is the longest
established, and perhaps the best known, of the volatility indexes. For a
description of it we can do no better than to reproduce here from the CBOE
website:
VIX and Volatility
The CBOE Volatility Index® (VIX® Index)
is considered by many to be the world's premier barometer of equity market
volatility. The VIX Index is based on real-time prices of options on the
S&P 500® Index (SPX) and is designed to reflect investors'
consensus view of future (30-day) expected stock market volatility. The VIX
Index is often referred to as the market's "fear gauge."
The same organisation has indexes for
other asset classes too, and currencies are no exception. The chart at the top
is the CBOE EuroCurrency volatility index, which gives us an indication of what
the market is expecting for the EURUSD pair.
EVZ
is now at a high level for the Euro
As can be seen from the one-year
chart above, volatility in the Single Currency is at a high level at present,
particularly in comparison to where it was this time last year. The waxing and
waning Greek situation, Eurozone Quantitative Easing and Federal Reserve
indecision about core interest rates could all be factors that contribute to
this.
The index often exhibits a seasonal
quality and can fall in the Summer months – a reflection, perhaps, of the old
adage that says stock traders “Sell in May and go away”. There is no sign of
that yet this year, but perhaps it is early days.
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