Australia’s ASX 200 VIX index, also known as the investor fear index, hit the highest level in over three years this morning.
The index takes real-time quotes for ASX 200 put and call options which are used to derive a weighted average of the implied volatility being incorporated into option pricing, according to the ASX’s website.
“The volatility index is primarily used as an indicator of investor sentiment and market expectations. A volatility index at relatively high levels implies a market expectation of very large changes in the ASX 200 over the next 30 days while a relatively low volatility index value implies a market expectation of very little change”, says the ASX.
With the index reaching as high as 24.329 in early trade, it suggests option investors are looking for extreme market volatility to occur in the month ahead.
That’s understandable given the possibility of a rate increase in the US for the first time in none years, along with mounting concerns over China’s economy.
It also explains why the underlying ASX 200 index currently trades at the lowest level seen since early February 2014 this morning.