Want to check how fearful investors are about the stock market? Look at the Vix…

Julie Brownlee, Fsp Invest, 21 Sep. 2015

Tags: vix, what is the vix, reading the vix, volatility index, how to use the vix,

The Vix is a common way to measure the fear factor on the stock markets at any one time.

It measures volatility on the world’s largest stock market index.

So what exactly is the Vix? And how can you read it?

Read on to find out more…

What is the Vix?

The Vix is the Chicago Board Options Exchange (CBOE) Volatility Index. It measures the implied volatility on the S&P 500. The S&P 500 is the main stock market index in the US.

The CBOE launched the Vix back in 1993.

The basis of the Vix is the price of put and call options on the S&P 500. These options give investors the right to sell or buy the index at a given level.

By looking at these options, the Vix determines how volatile traders expect the S&P 500 to be over the next 30 days.

How to read the Vix

When the Vix trades below 20, this implies low volatility. When it edges up over 30, this implies significant volatility and that investors are uncertain.

There are also similar volatility indexes for the Dow Jones (the VXD) and the NASDAQ (the VXN).

In October of 1987, the Vix hit 150, but within a day or so was back trading at normal levels.

During the financial crisis of 2008, the Vix went over 80.

Many investors see the Vix as a contrarian indicator. They see high levels on the Vix as a sign that investors are overly pessimistic and low levels as a sign that investors are too complacent.

You tend to find during times of stock market uncertainty that the Vix will rise.

So there you have it. Check the Vix if you want to know how fearful investors are about the stock market.

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