The S&P/ASX 200 VIX (A-VIX)

What Is the S&P/ASX 200 VIX (A-VIX)?

The S&P/ASX 200 VIX (A-VIX) is a real-time index that reflects investor expectations about volatility throughout the next 30 days in the S&P/ASX 200, the Australian benchmark equity index.

The S&P/ASX 200 VIX is utilized mainly as a barometer of market sentiment. As with other volatility indices, a relatively high A-VIX reflects uncertain investor expectations and more extensive trading ranges, while a lower A-VIX proposes investor confidence and narrower trading ranges.

How the S&P/ASX 200 VIX (A-VIX) Works

The S&P/ASX 200 VIX (A-VIX) leverages mid-prices for put and call options on the index to calculate a weighted average of the implied volatility of these options. The index interpolates volatility of the options nearest to maturity, relative to those of the options farthest from maturity, to determine a 30-day indication of expected volatility in the equity benchmark.

Like other VIX indices, the A-VIX displays a strong negative correlation with the underlying S&P/ASX 200 index, enabling market participants to position their portfolios for anticipated market changes. The launch of S&P/ASX 200 VIX futures in October 2013 enabled traders to speculate straightforwardly on expected changes in Australian equity market volatility in a single transaction.

The S&P/ASX 200 index covers about 80% of Australian equity market capitalization and is home to global mining giants like BHP Billiton and Rio Tinto, as well as large banks like Commonwealth Bank Australia and ANZ Banking Group.

The underlying ASX is a vertically integrated exchange group that is among the world's largest in terms of market capitalization.

The A-VIX will in general be more forward-looking than different indexes that mirror the current level of volatility in an underlying index.

Aggregating the implied volatility for each part of the index extends the assessment of market participants about the amount they anticipate that the overall index price should change in the near future. This allows traders to speculate on whether the volatility will be lesser or greater than the expectations, for example. It also allows contrarian traders to position for conceivable market reversals in either the A-VIX or ASX 200 when the A-VIX reflects extreme sentiment to either the upside or downside.

Special Considerations

The A-VIX is utilized for the most part by traders, rather than investors, be that as it may. Investors in the Australian stock market with strategies that incorporate market timing may watch the A-VIX for prompts about what could happen to the underlying index before very long. Nonetheless, many will generally overlook such more limited term signals, liking to stick with fundamental analyses that will generally zero in on the more drawn out term. Thus, few formally remember the A-VIX for their investment approaches.

Highlights

• The S&P/ASX 200 VIX, known as the A-VIX, is an index that measures how volatile investors think the S&P/ASX 200, Australia's benchmark equity index, will become over the course of the next 30 days.
• Like other VIX indexes around the world, a higher A-VIX correlates with greater investor uncertainty and logical swings in trading; a lower reading proposes greater investor confidence and narrower trading ranges.
• It is a forward-looking indicator of Australian market sentiment that is utilized primarily by traders, particularly the individuals who make utilization of market-timing strategies, versus longer-term investors.