Well, there's no reason to believe that
things in Ukraine are going to get any
better.
If you turn on CNBC, you'll probably
hear something like this:
indicator that the market doesn't know
which direction to move on this and I
wouldn't be selling at a time when the
VIX is at 30.
With sentiment index, the VIX, just
remember, in the peak of the pandemic,
we hit, you know, over 80 on the VIX,
The volatility index, also known as the
VIX, or even Wall Street's fear gauge.
It's always been called the Fear Index.
It basically takes a read of the
market's blood pressure.
The VIX goes higher when investors are
scared, anxious, nervous and uncertain.
What is the risk? What's the fear?
What's the level of uncertainty or even
the level of stress that's in the
marketplace at a given time?
It's just a unique tool that we can
actually quantify that.
So, even though volatility seems
intangible, there's actually a way that
markets measure such turbulence and
sentiment. I mean, take a look at this
equation.
What does it mean for the market when
Russia invades Ukraine, right?
So you can see that in the VIX, and you
can see that in real time in the VIX.
And investors rely on it
When you understand how investors are
feeling about what's going on in the
world, you can then understand how the
market may move.
Here's how market volatility is measured
and how investors use that information
to make money.
Stock price changes are simply the
product of people buying and selling
stocks.
So volatility is just price movements
that are above normal variance.
The reason that the VIX index was
created was it was a way to measure
what institutional investors or the big
investors were doing to hedge their
bets, and if they were hedging that the
market was going to go down.
That was a sign that there was fear in
the marketplace
When the VIX was originally introduced
in 1993 by the Chicago Board Options
Exchange, it had a different
methodology based on calculations
around the S&P 100, and that old
measure still goes by the ticker symbol
VXO. But since 2003, the CBOE updated
the VIX to be based on the S&P 500.
Because the S&P 500 is this measure of
the broad market, the VIX is a measure
of the volatility of the broad U.S.
stock market.
Usually, there is an inverse
relationship between the activity
that's happening in the major index,
which is the S&P 500 and what's going
on the base. It's generally inverse.
The VIX is a forward looking index
measuring implied volatility.
As the CBOE puts it, the VIX index is
intended to provide an instantaneous
measure of how much the market expects
the S&P 500 index will fluctuate.
Within 30 days it measures to what
degree investors are uncertain about
the stock market.
The movements are really triggered by
major events.
If it's negative news, then sometimes
people get get a little bit scared.
That's why when we talk about the VIX,
we call it the Fear Index, or people
tend to really kind of want to move and
transition their assets out of more
riskier assets and into more safe
assets.
If you look at the VIX over the past few
years, you can see it spike when the
pandemic hit in March 2020, which was a
record, and then again in October 2020,
when infections spiked and stimulus
negotiations stalled, or in November
2021 when Omicron swept the nation.
Then even more recently, when Russia
invaded Ukraine in February 2022
Overall uncertainty also spikes the VIX.
So when we see the VIX spiking and
getting higher in January and leading
in really the beginning of February,
that was primarily around this
uncertainty of the Fed and when they
were going to raise rates by how much
the pace, all of that kind of stuff.
There's a complex mathematical equation
at the core.
Basically, the VIX measures volatility
by tracking trading in S&P five hundred
options.
It's measuring implied volatility over
the next 30 days, and that's derived
from option activity.
So puts and call options are deriving
whether the VIX is above norm or below.
That's the catalyst for what sparks and
moves it in either direction.
Now, the options market makes this a
little tricky.
Options are just a hedge.
You don't own the stock outright, but
you're owning the option that's
tethered to the stock.
Let's say something happens in the
world. An event happens like the Fed's
uncertainty or Russia invading the
Ukraine, and investors believe that the
overall economy is not going to be more
positive in 30 days.
The options contracts that they are
buying, it's really betting on the
market going down.
Obviously, it can get far more
complicated from here, but just on a
very basic fundamental level, it's a
hedging opportunity.
What options contracts allow us to do is
bet on whether a price is going to go
up or price is going to go down.
This is what the VIX index follows to
gauge market volatility: those trades.
Imagine a rollercoaster when stocks
sell off.
Investors may get scared so they could
buy options to protect their
investments. All those protective
purchases, a.k.a.
options, send the VIX higher.
It's really measuring the degree of
price movements, so I think the larger
the price movements, the higher the
volatility. And just to kind of put
some things in perspective.
VIX readings over 30 are considered
relatively large volatility.
VIX below 20 is an indication that the
market is rather complacent, so there's
not a whole lot of concern for any
near-term volatility and or events that
would spark a draw down
When the VIX is popping, so it's
soaring, it's above 19, which is its
median, it's average.
It is mean reverting.
So when it moves up very quickly, it
comes back down to its center that 19
or its moving average, oftentimes you
can look at the 20 day or the 50 day
moving average.
When it gets very far away from those
technical levels, you can expect it to
fall back down into that territory
relatively quickly.
Oftentimes, investors are always looking
at the VIX today as, hey, 30 days from
now, you know, we're going to be
extremely volatile and that might not
be the case. They're taking input data
from today, buying activity premium
options for today.
That's implying the future for
tomorrow. But tomorrow could be a very
different day, and I think that's very
important to make sure you take note of
as a retail investor.
Investors can use the VIX to help them
make investment decisions, or they can
indirectly invest in it.
A couple of things that you can use the
VIX for. Number one, it really is this
kind of overall measure of the level of
market risk. Stress in the market.
And I think that that's really
important to understand before you're
making an investment decision.
When we see volatility spiking, it is a
signal for us to take a look at some of
the names or our high conviction name
list, you know, and see what's going on
with these names. But it's going to be
spiking for a number of reasons.
It could be, you know, some other
headline risk or headline news that's
impacting price movement.
And sometimes these are short term
issues. Sometimes they're more long
term issues where it might not be an
opportune time to buy at this level,
but it's a great indicator just to have
an understanding of volatility where
you're going and potentially what the
price moves might look like over the
next 30 days.
Investors can also invest in volatility.
They can invest in the VIX, so not
directly, but they can do it through
ETFs. Exchange traded funds were also
notes when they do that, see, there's
like a negative correlation between
volatility and stock prices.
So when you look at an overall
portfolio, sometimes you need certain
things to zig while other things are
zagging. So that's the whole kind of
point of asset allocation, right?
So like stocks and bonds and and
alternative asset classes, you have
these different elements in a portfolio
so that they do different things and
they also support one another.
When one is up, one might be down.
When one is up, one might be just a
little bit up. It's a good hedge for
the S&P 500.
Now the VIX can be used for short term
tactical trade ideas for sure.
Or if you are, you know, your window of
investing is much shorter, it might be
something you use as a key determinant
of when you kind of switch different
asset classes or different parts of the
market that you want to be invested in.
You know, the most important thing is
having a plan, whatever you are
investing for, whether you are a trader
or an investor, having a sound plan,
And if you're a long term investor, so
you're investing for retirement, you're
investing for something 20, 30 years
down the road. Today's VIX price
shouldn't concern you too much.
Invest in you ready set grow.
CNBC and Acorns.