what exactly is the VIX Index measuring, and what does its existence mean for our overall investment picture?
The VIX looks at the market prices of options on the S&P 500 Index, and measures what those option prices imply about the expected volatility of equities. Thus, the VIX is a forward-looking indicator, and because its value is derived from both puts (options to sell a stock) and calls (options to buy), it does not inherently look at what direction markets are expected to head, just at how bouncy the path will be. The reference options are short-term, meaning the period over which the volatility expectations are being made is about one month on average. What makes equity volatility an interesting statistic is that it’s historically been a good proxy for the level of uncertainty in the market, hence the VIX being sometimes referred to as the “Fear Index.” Bull markets are often characterized by steady advances with low standard deviation of returns, while the occasional correction, crash, or credit crisis is generally accompanied by a sharp increase in volatility. It’s that negative histo
