The VIX index, formally known as the CBOE Volatility Index, is a popular measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. It is often referred to as the “fear gauge” or “fear index” because it tends to rise when investors are fearful or uncertain about the market’s future direction.
Here are some key points about the VIX index:
Definition
The VIX measures market expectations of 30-day volatility for the S&P 500 index, derived from prices of options on the index.
Calculation
It is calculated by the Chicago Board Options Exchange (CBOE) and is based on a range of S&P 500 options over a wide range of strike prices.
Purpose
Investors use the VIX to gauge the level of risk, uncertainty, or stress in the market. A higher VIX generally suggests higher volatility and uncertainty, while a lower VIX indicates more stability or complacency.
Interpretation
When the VIX is low (often below 20), it generally reflects low market volatility and confidence. Conversely, a high VIX (often above 30) can indicate heightened fear, uncertainty, or potential for market downturns.
Uses
Traders and investors use the VIX in various ways, such as for hedging against market declines, timing entry or exit points in the market, or simply as a sentiment indicator.
Market Sentiment
While it primarily reflects S&P 500 volatility expectations, the VIX has become a broadly followed indicator in global financial markets, influencing trading strategies and risk management decisions.
Overall, the VIX index is a widely watched indicator that provides insights into market sentiment and expectations about future volatility in the stock market.
Lauren Hua is a private client adviser at Fairmont Equities.
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