What is the VIX and what does it measure?
Definition: VIX Volatility Index
The Cboe Volatility Index, or VIX, is a real-time market index that represents the market’s expectation of 30-day forward-looking volatility. It provides a measure of market risk and investors’ sentiments. It is also known by other names such as the “Fear Gauge” or “Fear Index.” Investors look to VIX values as a way to measure market risk, fear and stress before they take investment decisions.
The VIX traces its origin to the financial economics research of Menachem Brenner and Dan Galai. In 1989, Brenner and Galai proposed the creation of a series of volatility indices, including an index on stock market volatility. Since its creating it has become a helpful tool for investors.
The VIX is a helpful indicator to anticipate how the market will move in the future. When the VIX goes up it indicates higher market volatility. In turn, a high VIX is usually correlated with stocks going down. A low VIX, and stocks are usually trending up.
There really isn’t a “normal” level of the VIX. However, a relatively stable range in the VIX is somewhere between 13.0 and 20.2. When the indicator increases large moves in stock prices are typically happening in the market. For example, in 2020 during peak COVID fear the VIX skyrocketed up to 85.47. Conversely, in 2017 during a time of relative calm and good news from the FED the VIX hit an all time low of 8.84.
Keen users in online forums have identified that the VIX has trended up when meme stocks are on the rise and the fall.
”VIX is up, this is exactly the kind of confirmation bias I need to double down”
“Another good week, VIX goes below 20.”
“Buy market volatility, VIX is going to the moon! Calls on the VIX”