I’ve read many places that the VIX index is “the fear index” of the stock market. Nobody ever goes any deeper than that. I get that it’s a complex computation based on the change in price of a lot of stocks, and that it roughly correlates to volatility in the market. But “fear”?
In: Economics
The VIX measures the expected volatility of stocks, which means how much people expect stocks to make a large, sudden move. The larger or the more likely a move they expect, the more they’re willing to pay for options, so the higher the VIX.
Stocks tend to go up gradually and down suddenly. A stock that keeps going up steadily will generally have a low volatility. A stock that looks like the bottom is about to fall out will have a high volatility. So volatility tends to be about graph go down
The vix measures investor sentiment based on options trading used to gage what investors think the s&p500 is going to do
When a lot of options traders start betting the future price is going down; the vix goes up
We call this fear; people are afraid of the “impending doom”
Investing has a human component and a panicked crowd can move stock price….the stock market is a voting machine first then a weighing machine
You’re trying good responses here.
But, you should look at VIX versus the recession/crash over time. Once the vix gets over 24, strange things start happening.
See [VIX – Wikipedia](https://en.wikipedia.org/wiki/VIX) for a discussion of what VIX is (and there are several variants that CBOE calculates) and what it signals. In short, the basic VIX looks at activity of “out of the money” puts and calls for SP500. If that activity increases (that is, people start buying puts or calls outside the expected trading range of the SP500) then the VIX formula will note that. People buying options that would be considered longshots (“out of the money”) today are basically buying insurance against some large movement of the underlying equity. If a lot of that kind of activity occurs then that means that investors are anticipating some sort of event, usually negative.
Options are not something that you use as a retail investor unless you really know what you’re doing. You’re buying “rights” to buy or sell an equity at a defined price at a defined time. You can make money trading options generally faster than trading the underlying equities, but the risk is also greater.
The VIX measures volatility in the market at a given time. Since that isn’t something you can calculate directly we use the known relationship between volatility and current options pricing to determine volatility. When options are trading unusually high compared to normal levels the VIX goes up and vice versa
It’s a measure of volatility in the market, it’s not exactly a fear index. It might be by correlation though – there’s rarely volatility where markets are quickly spiking upwards, volatility is usually due to market crashes and sudden down movements.
Upward stock movements tend to be slow and steady, so VIX/volatility is usually lower during those periods.
But nothing in theory stops low-VIX, steady *downwards* stock movement either.
Latest Answers