DEFINITION of 'CBOE Nasdaq Volatility Index - VXN'
A measure of market expectations of 30-day volatility for the Nasdaq-100 index, as implied by the price of near-term options on this index. The VXN index is a widely watched gauge of market sentiment and volatility for the Nasdaq-100, which includes the top 100 U.S. and international nonfinancial securities by market capitalization listed on the Nasdaq. The VXN is quoted in percentage terms, just like its better-known counterpart the VIX, which measures implied volatility for the S&P 500. The Chicago Board Options Exchange (CBOE) launched the VXN January 23, 2001.
BREAKING DOWN 'CBOE Nasdaq Volatility Index - VXN'
The VXN was introduced in 2001 as the technology / dot-com bubble was deflating. CBOE developed the VXN because of the massive divergence between volatility on the Nasdaq market and the broad U.S. equity market from early 1999 onward. The Nasdaq index soared 137% in a 15-month period from January 1999 to its peak level of 5,132 in March 2000, before plunging 52% to just below 2,500 by December 2000. The S&P 500, by comparison, only gained 26% from January 1999 to its March 2000 peak, and declined 15% by end-2000.
The higher the VXN level, the greater the expectation for Nasdaq-100 volatility. Like the VIX, the VXN functions best as a “fear gauge” or indicator of market nervousness about the technology sector. Since its introduction, the highest level reached by the VXN was 86.52 in October 2008, at the height of the global financial crisis, while the lowest level was 11.34 in March 2013. The average level for the VXN over this period was 28.26; by way of comparison, the average level for the VIX over this time frame was 21.71. These two volatility measures correlate closely, and they generally - but not always - trade in lockstep with each other.
The methodology used by the CBOE to calculate the VXN – whose value it disseminates continuously during trading hours – is identical to that used for the VIX. VXN components are near-term (with at least one week to expiration) put and call options, and next-term options in the first and second Nasdaq-100 contract months. The selected options are out-of-the-money Nasdaq-100 puts and calls centered on an at-the-money strike price.