What it means
Options are contracts that give the right to buy or sell at a set price, and their prices rise when traders expect larger swings. The VXN takes the prices of a wide range of Nasdaq-100 options and converts them into a single number that represents expected volatility, quoted as an annual percentage.
A reading of 25 means the market is pricing in an annualised swing of about 25%. The Nasdaq-100 is dominated by large technology and growth companies, so the VXN is closely watched as a barometer for that part of the market.
It is the technology counterpart of the better-known VIX, which is based on options on the broader S&P 500 index. The two often move together, but the VXN is typically higher because technology shares tend to be more volatile.
The index usually rises when share prices fall sharply, because investors buy protection and push option prices up. For that reason it moves in the opposite direction to the market on most days.
A spike often accompanies a sell-off, and a long, quiet period of low readings can accompany a steady rally. Practical uses are varied.
Portfolio managers use it to judge how much hedging costs, risk teams use it to set position limits, and companies with large technology share holdings or share-based pay use it to see how nervous the market is. Traders can also gain exposure to it through futures, options and exchange traded products.
It is important to remember what it does not show. The VXN measures expected movement, not direction, and it is an estimate based on current option prices, not a forecast that is guaranteed to be right.
A high reading says investors expect large moves, but not whether they will be up or down. Readings also need context.
Levels that seem high in one period may be normal in another, and so it is common to compare the current figure with its own history rather than to a fixed threshold.
In practice
Real-world examples.
Example
A portfolio manager sees the VXN jump from 20 to 32 after disappointing earnings from large technology firms. She decides to buy put options to protect the portfolio, aware that the higher VXN means protection is now more expensive. She weighs this against the risk of further falls.
Example
A treasury team at a technology company with a large equity holding in a listed peer checks the VXN before deciding whether to hedge. The reading is low, so hedging is cheap, and they buy protection for the next quarter.
Example
A financial adviser explains to a nervous client that a VXN of 35 means the market expects large swings, in both directions. She uses the figure to remind the client that short-term volatility is normal and that the plan was built for it.
Formula
Calculation
Approximate expected daily move = VXN / square root of 252 (trading days in a year)
The square root of 252 is about 16, so a rule of thumb is VXN / 16. If the VXN stands at 24, the approximate expected daily move is 24 / 16 = 1.5%. On a $100,000 holding of Nasdaq-100 shares, a 1.5% move is $100,000 x 0.015 = $1,500 in either direction on a typical day. This is an approximation, not a precise forecast.Case study
Seen in the real world.
Cedarpoint Wealth is an illustrative, fictional advisory firm that manages portfolios with a high weighting to technology shares. Its risk committee used the VXN as one input to set its monthly risk budget.
When the VXN was below 20, the firm allowed full exposure. When it rose above 30, the firm reduced equity exposure by 10% and increased cash. In one quarter, the VXN climbed from 19 to 34 within three weeks, and the firm followed its rule.
The technology index later fell a further 9% before recovering. The illustrative portfolio held up better than a comparison without the rule, though the committee noted that a rule based on one indicator could also have sold too early in a different episode.
Watch out
Common mistakes.
- Reading a high VXN as a prediction that the market will fall, when it shows only that large moves are expected in either direction.
- Confusing the VXN with the VIX, when they are based on options on different indices.
- Comparing readings across different periods without allowing for what is normal in each period.
Questions
People also ask.
What does VXN measure?
It measures the expected 30-day volatility of the Nasdaq-100 index, based on the prices of options on that index.
How is it different from the VIX?
The VIX is based on options on the S&P 500, while the VXN is based on options on the Nasdaq-100, which is more weighted to technology.
Can I invest in the VXN directly?
Not directly, but there are futures, options and exchange traded products linked to volatility, which carry their own risks.
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