What is VIX (Volatility Index)?
The VIX is the Chicago Board Options Exchange Volatility Index, measuring the stock market's expectation of 30-day volatility based on S&P 500 index options. Often called the market's 'fear gauge.'
VIX (Volatility Index) Explained
The VIX typically moves inversely to the S&P 500 — it rises when stocks fall and falls when stocks rise. A VIX below 20 suggests low fear and complacency. A VIX above 30 indicates elevated fear and uncertainty. Extreme readings above 40 often coincide with market bottoms. Traders use the VIX to gauge market sentiment and adjust their risk levels accordingly.
Real-World Example
The VIX has been hovering around 14 for weeks, indicating complacency. A sudden geopolitical event spikes it to 35. A disciplined trader recognizes this fear spike as potentially overdone and might look for buying opportunities while reducing position sizes to account for the elevated volatility.
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