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As Market Slumps, Volatility Index Gets Pumped

Jeff Cox, Special to CNBC
Friday, 9 Nov 2007 | 3:18 PM ET

With rapid fluctuations becoming commonplace in the major stock indexes, about the only thing there is to be certain of is uncertainty.

That's why the Chicago Board of Options Exchange's Volatility Index, or Vix as it is commonly known, provides a fascinating barometer on the market's changes over the past several weeks. In fact, the index has risen more than 30 percent since Nov. 1, providing a snapshot of a broader market prone to do just about anything on any given day.

"Everyone is a lot more nervous than they were the last four years," said Stacey Gilbert of Susquehanna Financial Group. "I think there is an expectation for more volatility."

The Vix's roots go back to 1993, when it was launched as a way to gauge market movement. The index measures options trading among Standard & Poor's 500 companies over a 30-day period. There is some disagreement over what represents true volatility on the Vix, though it's generally accepted that a reading over 20 represents a volatile market and 30 represents high volatility. The Vix currently stands at about 27.

With markets likely to continue to tumble and roll, analysts say the results will be visible in the Vix.

Opportunities in Options
Given the market volatility and weakness in techs lately, investors are looking for clues in the options market on how things might shake out in the coming weeks. Stacey Gilbert, of the Susquehanna Financial Group, shares her insight.

"There's been a fear factor in the market that going back is probably as great as it's been, -- including the Internet bubbles -- than any time in the last 10 or 15 years," said Bill Lefkowitz, of vFinance Investments. "People are so nervous that they're willing to buy puts on anything."

All that short-selling drives the Vix, which represents an expected annual change in the options market. If the Vix were to stay around 28, for example, that would mean an expected change of 2.33 percent per month.

Lefkowitz thinks there are multiple reasons behind the recent market volatility -- troubles in the credit market, geopolitical tensions and investor uncertainty over Fed Chairman Ben Bernanke among them.

"There are a tremendous amount of causes, but all of them can lead to major movements in the market, which is a lot different than in the past," he said. "I think for the next year, you could have some crazy volatility out there."

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