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Understanding the VIX – The Fear Index in Stocks

December 12th, 2012

The VIX is known as the fear index because it is based on the amount of puts that are purchased.

Why?

  • The more puts that are purchased on the SP500, the higher the VIX
  • When puts are high that means people are buying protection
  • They think the market is going down

High v. Low VIX

  • High VIX versus low VIX is relative
  • It depends whether you're looking at historical or implied relativity, a high VIX can't necessarily be determined by its numerical value
  • The implied VIX is the state that you are currently in
  • Remember: when the VIX is high, it's time to buy; when the VIX is low, look out below
  • The VIX works opposite of the market (but it's not always 1:1)
  • When the VIX is high, stock prices go down because fear impacts selling to the negative side
  • When the VIX is low, stock prices start to increase because there is less fear, which means stocks will eventual tumble
  • It shows you how much protection people are buying with the puts

 

Author: Sasha Evdakov

Sasha is the creator of the Tradersfly and Rise2Learn. He focuses on high-level education speaking at events, writing books, and publishing video courses on business development, internet marketing, finance, and personal growth.

I'm Sasha, an educational entrepreneur and a stock trader. In addition to running my own online businesses, I also enjoy trading stocks and helping the individual investor understand the stock market. Let me share with you some techniques & concepts that I used over the last 10+ years to give you that edge in the market. Learn More

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