Key Takeaways
- Measures 30-day Nasdaq-100 expected volatility.
- Higher values signal greater market fear.
- Tech-focused alternative to broader VIX index.
- Updates multiple times per minute during trading.
What is VXN (CBOE Nasdaq Volatility Index)?
The CBOE Nasdaq Volatility Index (VXN) measures the market's expectation of 30-day forward volatility specifically for the Nasdaq-100 Index, which tracks 100 major non-financial companies listed on the Nasdaq exchange. It reflects implied volatility derived from near-term Nasdaq-100 put and call option prices, serving as a key gauge of investor sentiment and anticipated price swings in tech-heavy stocks.
Unlike the broader market-focused VIX, VXN concentrates on the technology sector, making it a critical tool for investors monitoring volatility in companies like Microsoft and NVIDIA.
Key Characteristics
VXN offers a focused view of expected market turbulence with several defining features:
- Tech-sector focus: Tracks implied volatility of the Nasdaq-100, which is heavily weighted toward technology and growth stocks, including prominent FAANG stocks.
- Volatility measurement: Expressed as an annualized percentage that signals fear or complacency in the market.
- Threshold interpretation: Values below 15 suggest low fear, while readings above 35 indicate elevated uncertainty.
- Real-time updates: Calculated and published multiple times per minute during trading hours by CBOE Global Markets.
- Comparison to VIX: Typically exhibits higher volatility due to the Nasdaq’s tech-heavy composition.
How It Works
VXN uses prices of out-of-the-money Nasdaq-100 put and call options with at least one week until expiration to derive implied volatility for a constant 30-day horizon. This method aggregates option premiums reflecting market expectations of future Nasdaq-100 price swings.
The index applies a model-free variance swap approach, filtering option prices to remove anomalies and annualizing the result into a volatility percentage. Elevated put option demand during market stress drives VXN higher, signaling increased tail risk for tech stocks.
Examples and Use Cases
Understanding VXN can enhance trading and risk management strategies, especially in tech-focused portfolios:
- Technology stocks: Investors tracking Microsoft or NVIDIA monitor VXN for signs of increased volatility that may impact their holdings.
- ETF volatility exposure: Products like QQQM provide exposure to Nasdaq-100 stocks, making VXN relevant for ETF investors assessing market turbulence.
- Market timing: Contrarian investors use VXN spikes above 35 to identify potential buying opportunities in tech stocks, while low readings may warn of complacency and forthcoming pullbacks.
Important Considerations
While VXN offers valuable insights into expected Nasdaq-100 volatility, it measures implied—not realized—volatility and can lag sudden events. It is specialized for tech stocks and does not capture risks in financial sectors.
Integrating VXN analysis alongside broader market indicators such as the SPY ETF can provide a more comprehensive volatility outlook. Additionally, consider complementing VXN signals with tools like factor investing to diversify risk management approaches.
Final Words
VXN offers a focused view on tech-sector volatility, signaling shifts in investor sentiment around Nasdaq-100 stocks. Monitor its levels closely to time market entries or hedges, especially during heightened uncertainty. Consider integrating VXN insights into your broader risk management strategy.
Frequently Asked Questions
VXN measures the market's expectation of 30-day forward volatility for the Nasdaq-100 Index, derived from implied volatility in near-term put and call options on the Nasdaq-100. It serves as a 'fear gauge' for the tech-heavy Nasdaq market.
Higher VXN levels signal greater expected volatility and investor fear or uncertainty, often during market downturns, while lower levels indicate calmer, more complacent market conditions.
VXN is calculated using prices of out-of-the-money Nasdaq-100 options with at least one week to expiration, applying a model-free variance swap methodology that aggregates weighted option prices and annualizes the implied volatility into percentage points.
Values below 15 suggest low fear and possibly a sell signal for contrarian investors, whereas values above 35 indicate high uncertainty and may be interpreted as a potential buy signal.
While VIX measures volatility expectations for the broader S&P 500 index, VXN focuses specifically on the Nasdaq-100, which is more tech-heavy and typically experiences higher volatility.
The CBOE Nasdaq Volatility Index (VXN) was launched on January 23, 2001, to provide a volatility measure focused on the Nasdaq-100.
During the 2008 financial crisis, VXN peaked at 80.64 as investors bought puts fearing steep Nasdaq-100 declines, signaling extreme volatility, whereas in March 2017, it fell to a low of 10.31 reflecting stable market conditions.
