Volatility index is a stock market indicator that shows how likely the prices of certain stocks are to fluctuate over a certain period of time. The VDAX volatility index, in particular, is used to measure the volatility of the DAX stock index. The DAX stock index is a German stock market index that consists of the stocks of 30 major German blue chip companies that are traded at Frankfurt Stock Exchange. It calculates the implied volatility for the next thirty days. This helps traders to better anticipate how big the stock price fluctuations are likely to get and customize their trading strategies accordingly.

Understanding Volatility

When stocks are traded at a stock exchange, their prices will usually go up and down over time. This change in prices is known as volatility. The volatility is directly related to the company's financial stability. The more financially sound the company is, the less volatile it will be.

When it comes to stock trading, volatility is something of a double-edged sword. On one hand, if the trading is timed right, volatility can result in significant profits. But if something goes wrong, it can result in equally sizable losses. Some traders prefer to play it safe and focus on stocks that have little volatility, while others prefer a more risky strategy that allows for more volatile stocks. Either way, traders want to be able to anticipate how volatile the stocks will be.

This anticipated volatility is known as implied volatility. It is calculated based on the financial data of the stocks within a given stock index. The calculations are made based on the current financial data. This means that the calculations aren't foolproof. There is always a chance that some sudden economic change can cause fluctuations in stock prices, rendering the index invalid. But even with that in mind, the traders continue to use volatility index, since it gives some measure of predictability to the fate of their stocks.

Understanding DAX Stock Index

All stocks in the DAX stock index are blue chip stocks. Blue chip stocks belong to companies that remained financially stable over the long period of time. While the blue chip stock companies are not immune to financial problems, they are much more likely to survive economic difficulties. This means that blue chip stocks significantly less volatile than other stocks.

Since DAX stocks belong to German companies, their prices are given in euros. Traders from outside the Eurozone will need to look up the most current currency exchange rates to see how much they are worth in their home countries.

Calculating Implied Volatility of DAX Stock Index Stocks

VDAX volatility index indicates the implied volatility of the DAX stocks. The volatility index is automatically calculated using computers. The computers take the DAX stocks that are traded using the Eurex electronic trading system and runs their financial data through a series of equations. The VDAX volatility index is recalculated every minute between 8:50 AM - 5:30 PM Central European Time. VDAX index data is available online 24 hours a day.

The VDAX volatility index number is the percentage of the current stock price. So, for example, if the VDAX volatility index is at 30 percent, the stock price is likely to rise or fall by no more than 30 percent over the course of the next 30 days. The VDAX index cannot predict which way the stock prices will go.

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