VIX — the fear index that shows the real fears of the market

Do you know why traders and investors constantly repeat the phrase “fear index”? It's simple — VIX is the market's seismograph that reacts to panic.

How does it work?

When the S&P 500 rises, the VIX falls. When stocks plummet, the VIX soars. Why? Because it is an index of implied volatility of options. When people in panic start buying protective (put options), their prices rise, and along with them, the VIX.

Normal range: 10-25 points 2008 year, crisis: 80+ points 2020 year, corona: also 80+ points

How to use it?

VIX is based on S&P 500 options with expiration terms of 23-37 days. The calculation includes both monthly and weekly options. Computers continuously recalculate the index in real-time, making it impossible to do this manually.

Traders can trade options on VIX, futures, or ETFs, but be careful — it is risky for beginners.

Interesting fact

VIX and S&P 500 have a reverse correlation — when one rises, the other falls. This makes VIX an ideal tool for hedging a portfolio during market upheavals.