The VIX

Answer 1

One tool you can use as an investor is the VIX. VIX is the symbol of the Chicago Board Options Exchange (CBOE) index that tracks the volatility of the S&P 500. It is sometimes referred to as the “fear index”. The VIX reflects the market’s expectations for the volatility of the S&P 500 index over the next 30 days.

Rather than showing you whether the market is about to go up or down the VIX gives some indication as to how likely the market is to move in either direction. The higher the VIX goes the more investors are expecting a move, up or down, in the S&P 500.

The VIX is calculated by taking by taking into account the implied volatility of both call and put options on the underlying stock index. There are two other “fear indexes” you might also want to keep an eye on: The VXN tracks the volatility of the NASDAQ 100 and the VXD tracks volatility of the Dow Jones Industrial Average (DJIA). Together they can give you a good idea of investors’ expectations of volatility over the short run.

Usually a VIX value over 30 is an indication of high expectations of volatility, whereas a value of less than 20 indicates less stress in the market and little chance of big swings.

If you expect a lot of volatility coming soon but you’re unsure in which direction the market is going to head you can still use these “fear gauges” to your advantage. There are exchange traded notes (ETNs) available to track the VIX index. Yes, you heard right; an asset that tracks the performance of an index that tracks the expected volatility of another index that tracks the performance of 500 stocks. VIX trading isn’t for everyone but if you know what to look for you could profit quite handsomely by taking advantage of the overall sense of uncertainty in the market.