The VIX: Wall Street's Fear Index

What is the VIX

The VIX is an abbreviation for the Volatility Index. Think of it as a "fear meter" for the stock market. It represents how investors are feeling about the market every single day. When the VIX is low, the market is usually positive while investors are calm and volatility is low. On the other hand, when the VIX is high, investors may be panicking at volatility is expected to be high.

Why is it called the "Fear Index"

The VIX isn't like any other index fund. It doesn't actaully track any particular stocks. It tracks how worried people are about the current state of the market. The higher the fear, the higher the VIX. It's almost like a class before a big test: msot kids seem relaxed but if one person seems panicked, then the nerves could spread.

How Does the VIX Work?

Well if the VIX doesn't look at individual stocks, how does it actaully gain or lose value? Well, it uses what we call options prices. You learned last week that options are contracts singed by investors for wether they think a stock will rise or fall. The VIX uses these contracts to see if people are nervous about the market or not. If people are buying lots of calls, then the VIX will drop because people think the market will rise. If people people are buying lots of puts, then the VIX will rise because people are nervous about the market falling.

Why do investors care about the VIX?

• The VIX helps investors see when fear is building in the market

• The VIX can act as a warning signal for investors about rough times coming

• Some investors trade VIX-related indexes trying to profit when the market is an a fearful or calm state