The Cboe Nasdaq Volatility Index (VXN) is a metric that gauges market expectations of 30-day volatility within the Nasdaq 100 index. This anticipation is implied by the prices of options listed on the Nasdaq 100. Launched by Cboe Global Markets in January 2001, the VXN serves as a critical barometer for market volatility, particularly within the tech sector.
Key Highlights
- The Cboe Nasdaq Volatility Index (VXN) is a real-time index that reflects the market’s expectations for volatility in the Nasdaq 100 over the next 30 days.
- Created as a counterpart to the VIX, the VXN specifically measures volatility within the tech-heavy Nasdaq 100, often divergent from broader market trends.
- Calculated using implied volatilities from Nasdaq 100 options, the VXN is considered a “fear gauge” that reflects market unease concerning the tech sector.
Grasping the Essence of Cboe Nasdaq Volatility Index (VXN)
The VXN index is closely monitored as a gauge of market sentiment and volatility for the Nasdaq-100, comprising the top 100 U.S. and international non-financial securities by market capitalization listed on the Nasdaq. Quoted in percentage terms, the VXN parallels the Cboe Volatility Index (VIX), which measures 30-day implied volatility for the S&P 500 index.
The launch of the Cboe Nasdaq Volatility Index in 2001 coincided with the deflation of the dot-com bubble in technology stocks. Cboe developed the VXN to highlight the stark volatility discrepancy between the Nasdaq market and the broader U.S. equity market since early 1999.
For example, from January 1999 to its peak in March 2000, the Nasdaq soared 157% to a high of 5,048, before plunging 52% to below 2,500 by the end of 2000. In contrast, the S&P 500 only gained 21% before its March 2000 peak, followed by an 18% decline by year-end.
Higher VXN levels signify elevated expectations for Nasdaq-100 volatility, reflecting overarching market anxiety about the tech sector.
It’s worth noting some historic peaks in VXN levels: September 2001 saw a high of 71.72 post-9/11; in October 2008, during the global financial crisis, it peaked at 79.16; and in March 2020, amid the global economic shutdown, VXN hit 80.08. Conversely, March 2017 saw the lowest level at 10.31.
VXN Methodology and Insights
The Cboe computes the VXN’s values continuously during trading hours, utilizing the same methodology it employs for the VIX. The VXN’s components are near-term put and call options, and next-term options spanning the first and second Nasdaq-100 contract months. This includes options with more than 23 days but less than 37 days to expiration. The methodology concentrates on selecting out-of-the-money Nasdaq-100 puts and calls centered on at-the-money strike prices.
VXN Movement Interpretation
Movement in the VXN reflects the level of implied volatility derived from prices of Nasdaq 100 options. Increases signify higher variances in the underlying securities’ prices, usually indicative of market uncertainty.
Conversely, decreases denote lower volatility, suggesting a tendency for prices to trade within a tighter range. Analysts typically follow the VXN in conjunction with the Nasdaq 100 to discern volatility in relation to market movements.
Related Terms: volatility, Nasdaq 100, options, Cboe Global Markets, implied volatility, fear gauge.
References
- Cboe Global Markets. “Cboe NASDAQ-100 Volatility Index”.
- Nasdaq. “NASDAQ Grants License to the CBOE Futures Exchange to Trade Futures On the CBOE NASDAQ-100 Volatility Index”.
- Cboe Global Markets. “Cboe VIX FAQ”, Select, What is the Cboe Volatility Index (VIX Index)?
- ResearchGate. “More Than You Ever Wanted to Know About Volatility Swaps”.
- Cboe Global Markets. “Cboe NASDAQ-100 Volatility Index Methodology”, Page 1.
- Federal Reserve Bank of St. Louis. “NASDAQ Composite Index (NASDAQCOM)”.
- Yahoo Finance. “S&P 500 (^GSPC): Historical Data”, Select Time Period Dec. 31, 1998 - Dec. 31, 2000.
- Federal Reserve Bank of St. Louis. “CBOE NASDAQ 100 Volatility Index (VXNCLS)”.
- Cboe Global Markets. “Cboe VIX FAQ”, Select, How is the VIX Index calculated?
- Cboe Global Markets. “Cboe NASDAQ-100 Volatility Index Methodology”.
