Cboe Nasdaq Volatility Index (VXN): What it Means, How it Works

What Is Cboe Nasdaq Volatility Index (VXN)?

The Cboe Nasdaq Volatility Index (VXN) is a measure of market expectations of 30-day volatility for the Nasdaq 100 index, as implied by the prices of options listed on this index. The Cboe Global Markets (Cboe) launched the VXN in January 2001.

Understanding Cboe Nasdaq Volatility Index (VXN)

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 non-financial securities by market capitalization listed on the Nasdaq. The VXN is quoted in percentage terms, just like its better-known counterpart the Cboe Volatility Index (VIX), which measures 30-day implied volatility for the S&P 500 index.

The Cboe Nasdaq Volatility Index was introduced in 2001 as the dot-com bubble in technology stocks was deflating. Cboe developed the VXN because of the massive divergence between the volatility seen in the Nasdaq market compared to the broader U.S. equity market from early 1999 onward.

Indeed, the Nasdaq soared 157% in a 15-month period from January 1999 to its peak level of 5,048 on March 10, 2000, before plunging 52% to below 2,500 by December 20, 2000. The S&P 500, by comparison, only gained 21% from January 1999 to its March 24, 2000 peak, and then declined back down 18% by the end of 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 71.72 in September 2001, brought on by the 9/11 attack. Other notable peaks include 79.16 in October 2008, at the height of the global financial crisis, and 80.08 in March 2020, as the world reeled under the global economic shutdown. The 2020 crisis-induced VXN spike proved to be short-lived as the gauge returned to levels in the 30s. On the flip side, the lowest level was 10.31 in March 2017.

VXN Methodology and Interpretation

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 (options with more than 23 days and less than 37 days to expiration). The selected options are out-of-the-money Nasdaq-100 puts and calls centered on an at-the-money strike price.

Movement in the VXN represents the level of implied volatility from the prices of listed options on the Nasdaq 100 index. Increases in the VXN and positive movement represent higher variances in the underlying securities’ price from their average. This usually occurs with uncertainty.

Decreases in the VXN and negative movement represents lower volatility and a greater propensity for prices to trade in a tighter range. The VXN is generally followed along with the Nasdaq 100 to understand volatility in relation to positive or negative movements in the prices of the index.