Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - Part 2 - 3rd Dec 21
Stock Market Major Turning Point Taking Place - 3rd Dec 21
The Masters of the Universe and Gold - 3rd Dec 21
This simple Stock Market mindset shift could help you make millions - 3rd Dec 21
Will the Glasgow Summit (COP26) Affect Energy Prices? - 3rd Dec 21
Peloton 35% CRASH a Lesson of What Happens When One Over Pays for a Loss Making Growth Stock - 1st Dec 21
Stock Market Sentiment Speaks: I Fear For Retirees For The Next 20 Years - 1st Dec 21 t
Will the Anointed Finanical Experts Get It Wrong Again? - 1st Dec 21
Main Differences Between the UK and Canadian Gaming Markets - 1st Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - 30th Nov 21
Omicron Covid Wave 4 Impact on Financial Markets - 30th Nov 21
Can You Hear It? That’s the Crowd Booing Gold’s Downturn - 30th Nov 21
Economic and Market Impacts of Omicron Strain Covid 4th Wave - 30th Nov 21
Stock Market Historical Trends Suggest A Strengthening Bullish Trend In December - 30th Nov 21
Crypto Market Analysis: What Trading Will Look Like in 2022 for Novice and Veteran Traders? - 30th Nov 21
Best Stocks for Investing to Profit form the Metaverse and Get Rich - 29th Nov 21
Should You Invest In Real Estate In 2021? - 29th Nov 21
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21
Stock Maket Trading Lesson - How to REALLY Trade Markets - 26th Nov 21
SILVER Price Trend Analysis - 26th Nov 21
Federal Reserve Asks Americans to Eat Soy “Meat” for Thanksgiving - 26th Nov 21
Is the S&P 500 Topping or Just Consolidating? - 26th Nov 21
Is a Bigger Drop in Gold Price Just Around the Corner? - 26th Nov 21
Financial Stocks ETF Sector XLF Pullback Sets Up A New $43.60 Upside Target - 26th Nov 21
A Couple of Things to Think About Before Buying Shares - 25th Nov 21
UK Best Fixed Rate Tariff Deal is to NOT FIX Gas and Electric Energy Tariffs During Winter 2021-22 - 25th Nov 21
Stock Market Begins it's Year End Seasonal Santa Rally - 24th Nov 21
How Silver Can Conquer $50+ in 2022 - 24th Nov 21
Stock Market Betting on Hawkish Fed - 24th Nov 21
Stock Market Elliott Wave Trend Forecast - 24th Nov 21
Your once-a-year All-Access Financial Markets Analysis Pass - 24th Nov 21
Did Zillow’s $300 million flop prove me wrong? - 24th Nov 21
Now Malaysian Drivers Renew Their Kurnia Car Insurance Online With Fincrew.my - 24th Nov 21
Gold / Silver Ratio - 23rd Nov 21
Stock Market Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First - 23rd Nov 21
A Month-to-month breakdown of how Much Money Individuals are Spending on Stocks - 23rd Nov 21
S&P 500: Rallying Tech Stocks vs. Plummeting Oil Stocks - 23rd Nov 21
Like the Latest Bond Flick, the US Dollar Has No Time to Die - 23rd Nov 21
Why BITCOIN NEW ALL TIME HIGH Changes EVERYTHING! - 22nd Nov 21
Cannabis ETF MJ Basing & Volatility Patterns - 22nd Nov 21
The Most Important Lesson Learned from this COVID Pandemic - 22nd Nov 21
Dow Stock Market Trend Analysis - 22nd Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

What You Need To Know About the VIX Volatility Index

Stock-Markets / Volatility Aug 31, 2011 - 12:57 PM GMT

By: Marty_Chenard

Stock-Markets

Part 1: Why is the VIX (Volatility Index) an Important tool for Investors?

The VIX explained: Few really know what the Volatility Index is or how it is calculated. Here's are two brief explanations ... the first is a technical explanation, and the second is a description that investors can easily understand.


First, a brief technical explanation ... The Volatility Index (or VIX) is a weighted measure of the implied volatility for real time $SPX put and call options. The puts and calls are weighted according to time remaining and the degree to which they are in or out of the money. From this is created a hypothetical at-the-money option with a 30 day expiration time period. In this way, they are trying to set a value that is equal to the equivalent value of the $SPX's current price. (When a stock's option strike price is "at the money", it is theoretically the same as the price the stock is trading for at that moment.) So what does that mean? It means that the VIX really represents the "implied volatility" for the hypothetical $SPX put/call options on an "at the money" option value.

Second, a brief understandable explanation ...

Simply put, the VIX is a key measure of market expectations in the near term. For almost 20 years, the VIX has been considered as a valuable barometer of investor sentiment and volatility. Another way to look at it, is that it measures perceived risks of investors. The greater the perceived risks investors have about stocks, the more they buy "protection Put options", which means that the VIX will therefore be moving higher. When the VIX moves higher, the market moves lower because they are inversely related.

Many talk about the VIX's implied volatility changes ... but, don't get caught up about the term "implied volatility" if you don't understand it. What is important is that the VIX moves up during times of uncertainty or fear, and down during times of greed or confidence. Since the VIX moves in the opposite direction of the market, you can know what to expect for upcoming market movements by observing what is happening to the VIX. If you think about it, the VIX is a good example of "the self fulfilling prophecy". (The definition from Wikipedia is: "A self-fulfilling prophecy is a prediction that directly or indirectly causes itself to become true, by the very terms of the prophecy itself, due to positive feedback between belief and behavior.")

How does it work as a self-fulfilling prophecy? Imagine that an investor has bought a lot of equities over time and now believes that market risks are rising, so he feels that it would be wise for him to buy protective Put options in order to protect his equity. If he believes the market risks are truly rising, he not only buys the Puts, he also stops buying ... otherwise it would be counter-productive. The mere action of enough large investors stopping their buying is often enough for the market to be unable to sustain its up movement. Thus the market pulls back a the self-fulfilling prophecy event occurs.

**NOTE** Since investors have to buy options expiring in the future in order to protect themselves from their perceived beliefs about upcoming changes in the stock market, those actions cause the VIX to move ... and the VIX's movement therefore measures investor expectations of what they believe will happen in the near future. That's it ... this is all you need to know about what the VIX really is.

Since the VIX reflects the actions of investors who buy options as insurance against losses on their current portfolio positions, it would suggests that the VIX's action is predicated on the actions of some very knowledgeable, as well as some very large investors.

So, should you learn more about the VIX and use it ... or not? Here is what you need to ask yourself and decide about: Is the VIX a reliable measure for me to use in determining what will happen to the stock market or not?

If it isn't, then simply disregard it and do NOT use it as an important tool for making investment decisions. HOWEVER, if it is, then you MUST consider using the VIX as a tool when making investment or trading decisions.

I know that you cannot answer this question without also knowing how the VIX tracks with the Stock Market, and how to use the VIX in an effective manner. So, within a week, we will post Part 2 of this Series on the VIX. The title of Part 2 on the VIX will be: "How to Use Technical Analysis on the VIX to know when the market will change direction."

Send This Page To a Friend

By Marty Chenard
http://www.stocktiming.com/

Please Note: We do not issue Buy or Sell timing recommendations on these Free daily update pages . I hope you understand, that in fairness, our Buy/Sell recommendations and advanced market Models are only available to our paid subscribers on a password required basis. Membership information

Marty Chenard is the Author and Teacher of two Seminar Courses on "Advanced Technical Analysis Investing", Mr. Chenard has been investing for over 30 years. In 2001 when the NASDAQ dropped 24.5%, his personal investment performance for the year was a gain of 57.428%. He is an Advanced Stock Market Technical Analyst that has developed his own proprietary analytical tools.  As a result, he was out of the market two weeks before the 1987 Crash in the most recent Bear Market he faxed his Members in March 2000 telling them all to SELL.  He is an advanced technical analyst and not an investment advisor, nor a securities broker.

Marty Chenard Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in