Why is VIX called “the fear index”?

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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

6 Answers

Anonymous 0 Comments

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.

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