 You may or may not have heard of the Wix index The Wix is one of the most watched indexes in the US markets and we're going to take a deep dive into the Wix index and Why this index is so important to follow so important to watch We are also going to look at the details about how this Wix index is calculated But we'll try to keep the discussions at the practical level So the Wix index is called the fear index and we'll be looking at why this is the case Why it's called the fear index in general the Wix index gives an Important sentiment indicator to all the participants in the market and that sentiment is the sentiment of fear so a high level of Wix Means that there is a high level of fear in the market and obviously the converse is also true So now the Wix index itself came into being in the early 90s about 1992 1993 But this relationship has evolved over the last 20 years Back in the 90s this the relationship between the Wix index and the SPX Was very different from what it is today. So we know in general that as volatility goes up We know that option prices are going to increase Now we're going to see on the think-or-sweep platform how this takes place and What it is in what exactly does a high level of Wix due to option prices? So we're going to take a few different examples there You'll see that the Wix levels the Wix is actually today at around 14 13 to 15 so it's been it's been fairly low So that's a when you have the Wix in the teens It's a fairly low number for the Wix when it starts going above 20 and 30 That's when there is fear creeping into the markets and when it's over 40 or 50. There's absolute mayhem I mean there's chaos in the markets in global markets in general and you'll see what that kind of an environment Does to option prices and we're also going to look at a stock We're going to look at Google and we'll study what the Wix levels does to option prices The Wix is an index but it is not traded like a stock Although there are options on the Wix the Wix is not a stock. You cannot buy and sell the Wix itself and Therefore if you have options on the Wix all options as we know must have an underlying asset and So this underlying asset is the Wix futures now the Wix futures is a completely different product It's not a stock. It's a futures contract and Futures contracts open up for three months at a time So you'll have the Wix futures for the next month the month after that and then the month after that but the relationship of the Wix options is with the Wix futures and Therefore the Wix options do not make a very good trading vehicle at all In fact, I would highly recommend that you do not trade the Wix at all The trade the Wix options I meant because these options are based on how the futures move and so If you don't understand how the Wix futures work Then your options are not going to behave the way you expect them to behave So for example, I'll give you a small example. Let's say the Wix index goes up by two or three points You would expect that if you hold Wix call options and let's say the Wix goes up by two or three points You would expect that your Wix Call options will increase in value, but it may not do that because the Wix futures may be doing something else that the Wix Options has a relationship with the Wix futures and not with any other underlying asset But having said that the Wix index is one of the most important indexes to follow And so that's what we're going to focus on in this course Then in the last few years, we've had a couple of other Wix products One is the NASDAQ Wix, which is the symbol NVX and then we have a third Wix product for the Russell 2000 index And that's called the RVX and then finally What is the other important thing about the Wix index is how do you trade based on a certain value for the Wix index? So whether the Wix index is low medium or high What kind of trades can you take? How would you take advantage of all these three situations because we know and you know when we deal with options You can pretty much deal with any kind of situation in the market How will you optimize your trading strategy based on a certain Wix environment that exists at that time? So some of it may get a little technical But I think it's important for you to hang in there and just follow what's going on now None of this is extremely important where you have to remember all these Technicalities this is all just for your information the practical aspects of this course are going to be two things one is how does a certain level of Wix affect option prices and Two is given a certain level of Wix what kind of trading strategies make sense So those are the real two takeaways from this course and we'll be looking at both of these in detail But to understand what we are talking about you do need to go through a little bit of technical stuff the definitions and You know what was the design behind the Wix index and all of that? So we'll go over to section 2 where we'll take a look at the Wix definitions and it's and the way it's calculated This is a document issued by the CBOE about volatility indexes This is a very recent document. It's it was released in January 2012 and First of all we can see that the Wix is based on the SMP 500 index options and is considered by many to be the world's premier barometer of investor sentiment and market volatility So the Wix is a measure of Volatility in the market, but let's just take a brief Look at what the CBOE themselves have presented in this document This is a chart of the Wix average daily closing value from 1990 to 2011 So if we just look at this top graph here We know that the years between 1992 and 1997 were you can see the SMP 500 index here in the blue if you look at the second chart and then the orange graph is that of the Wix index so in the early years, you can see that between 1993 to 1999 the SMP was going up very nicely and In many cases the Wix also started going up I guess this is when the Wix was very early in its days and Market participants were somewhat confused how to use the Wix and therefore you had some extraordinary Correlationships here this this is a correlation ship that broke down that broke down somewhere around 1999 Just before the dot-com bust it started breaking down. So let's just study that So what happens here is that the SMP 500 starts going up from 1993 or 1994 all the way up to 99 and 2000 and The Wix in its early years also started going up We can see that the Wix level the Wix level is measured on the left-hand side of the y-axis So we have a Wix level of about perhaps 15 During these years and as the SMP climbs from about 600 all the way to 1200 and and and further the Wix also climbs and we can see that the Wix reaches a level of about 45 in 1998 97 98 and then the Wix actually starts dropping when the SMP starts going higher and You can see that this is actually a low point in the Wix So it starts a new kind of a relationship with the SMP 500 sometime around 1997 or 98 So as the market start to go up the Wix starts to come down once the dot-com crash happened in 99 2000 The SMP starts crashing and then the Wix starts going up So from that time onwards the Wix and the SMP 500 have been negatively correlated meaning if the SMP 500 goes up the Wix comes down and If the SMP 500 goes down the Wix goes up. So we can see that kind of a correlation Perfectly from around 2019 from the time of the dot-com crash and actually slightly a couple of years before that it starts around 97 98 That's when even the market start to go up the Wix starts to come down and Similarly when the market starts to go down the Wix starts to go up So from that point onwards the Wix and the SMP 500 have held Inverse correlation then from 2002 onwards the SMP 500 starts to go up and the Wix starts to come down so from a level of about 45 in 2001 2002 the Wix drops down again to a level of about 15 maybe even slightly lower than that and then we have the financial crisis of 2007 2008 Mostly it's 2008 and 2009 So the SMP starts crashing again and comes all the way almost down to 600 But the Wix goes from a level of about 12 all the way up to 80 in fact the high of the Wix was is on based on the closing value is 80.86 on November 20th of 2008 and that is this point right here but you'll see that the High for the day if for the intraday high for that day is I think it's crossed 90 also we'll go to the think-or-swing platform and we'll exactly see what the high was But I believe it's in the 90s but the closing value high is 80.86 and that is almost at the same point where the SMP 500 is at its lowest point and Then from 2009 onwards the market starts to go up again The SMP 500 is going up and you can see that the Wix crashes all the way down back to 15 So it comes down from a value of close to 90 all the way down to 15 and since then again, you can see that Even if there is a slight hiccup in the market Let's look at this part right here the SMP probably crashed from 1200 to perhaps 1100 or maybe 1050 That's about it, but look at the Wix it jumped from 15 to perhaps 45 again and Then the market starts to go up again and then the Wix crashes back to 15 and Then again, we have a hiccup right here, which was last August and we're going to see this on the chart It's a very recent phenomenon So we're going to study this part of the SMP action and the Wix action when we go to the trading platform So what ends up happening is again the SMP crashes from perhaps around 1300 level down to about 1100 and the Wix spikes from 15 all the way up to almost 50 and Since then we've been the last four five months We've been on an uptrend and the Wix is back down to about 16 or 17 level So while the initial years, I think there was some confusion as to how the Wix index worked You can see that in these years the SMP 500 and the Wix was in perfect correlation with each other Then sometime around 9798 this correlation started to break down and as the SMP went up the Wix came down And then as the SMP came down the Wix started going up and then as the SMP went up again the Wix went down and so on and so forth so it's been on a perfect inverse correlation for about 13 to 14 years now and That's the way it's going to be in the future because We have to understand how the Wix itself is calculated and We also have to understand What kind of a value or what kind of a sentiment do investors Attached to the Wix index and I think that has a big part to play also Before we go and see how the Wix is calculated. I just want to show you these two graphs as well This graph shows how the Wix is negatively correlated with the SMP 500 So we can see that in the last eight or nine years We have a total negative correlation between the Wix and the SMP 500 So what these numbers mean here is that for every one point move up in the SMP 500 index The Wix goes down by 76 cents Similarly, you can see that the correlation in the more recent years are actually quite a bit Close to a negative one. So a negative one correlation would be a perfect Inverse correlation has a beta of negative one So for every one point move to the upside on the SMP 500 the Wix will go down by one point And for every one point move in the SMP 500 to the downside Will result in a one point increase in the Wix to the upside. So it's a perfectly inverse correlation Well, it's not perfect. It's a it's 0.84 and 0.85 which is very close to a perfect inverse correlation So you've heard me say in a couple of previous courses When the markets go up the volatility levels go down Because there is no fear when the markets are going up. There is a perception of stability and Therefore the level of the Wix comes down and when the markets go down The level of the fear goes up and therefore the values of the Wix go up So you do have options on the Wix but the options are a little strange because the Wix index options are Based on the Wix futures. We've talked of options on an underlying asset. That is either a stock index an ETF or some kind of commodity like gold or silver and things like that the underlying asset for the Wix options Are the Wix futures? So this may be a little complicated You don't have to worry about it because I would highly recommend not trading the Wix the Wix is an Extremely important indicator to follow not to trade are based on the Wix futures and not on the S&P 500 So there is a mismatch there and the Wix will the options on the Wix will not move as You expected to your standard Delta and your other Greeks may not work the same way like you would expect it to So I would highly recommend not trading the Wix What does a high level of Wix do to option prices and what does a low level of Wix do to option prices? That's because that's the critical point and you can and you'll see that it it makes a world of difference