VIX (CBOE Volatility Index)

1. Definition

The VIX is a real-time market index representing the market's expectations for volatility over the coming 30 days. * It is derived from the price inputs of the S&P 500 index (SPX) options.

2. Nickname: The Fear Index

It is often referred to as the "Fear Index" or "Fear Gauge" because it tends to spike when the stock market crashes or when investors are anxious about the future. * Inverse Relationship: Historically, the VIX moves opposite to the S&P 500. When stocks fall, VIX rises.

3. Interpretation of Levels

The VIX value represents the annualized expected movement in percentage terms. * Below 20: Complacency. The market is calm, and investors are optimistic (Bull Market). * 20 - 30: Elevated concern. Volatility is increasing. * Above 30: High Fear. Significant uncertainty. * Above 40: Panic. Often associated with market crashes or financial crises (e.g., 2008 Crisis, 2020 Pandemic).

4. Usage

1. Contrarian Indicator: Extremely high VIX readings often signal capitulation, suggesting that the market may be near a bottom ("When the VIX is high, it's time to buy").
2. Hedging: Traders buy VIX-related products (ETFs, Futures) to insure their portfolios against market downturns.