What is Volatility Index?
Volatility Index (VIX), is one of the barometers reflecting the market’s investment sentiment. The VIX is a market indicator introduced by the Chicago Option Exchange (CBOE) since 1993. The core concept of the VIX is to reflect “the implied volatility of the S&P 500 index in the next 30 days”.
When the VIX index is higher, it means that investors are uneasy and unpredictable about the prospect of the stock market, there may be a lot of buying or selling, and the S&P 500 index may fall. On the contrary, if investors believe that the future stock market performance is stable and the volatility is quite small, the VIX index will fall or remain relatively low, while the S&P 500 index will be in a stable state.
A high VIX index means investors are panic about the market outlook?
In a statistical sense, the VIX index should be regarded as the investor’s potential reaction in the next month to the current market vibes, events and news. A high VIX index does not mean pessimism about the market performance, but only means that investors believe that the market will fluctuate violently. While this volatility probability includes both positive upside and negative downside risk statistically.
However, looking back at the past trend of the VIX index, the state of the index at an all-time high is usually strongly associated with negative market news, and therefore it is regarded as a panic index by investors. At the most time, the VIX index will usually be between 10-20.
- When the VIX index < 20, it is usually the financial market in a stable situation.
- If the VIX index > 30, it indicates that the market is volatile and investors are panicking
- Once the VIX index > 40, it means that there may be irrational panic sentiment in the market.
How should investors determine the VIX index?
In most cases, the stock market performance and VIX have generally shown opposite trends. Therefore, the VIX index can be used as a reference indicator for investors’ hedging strategies.
For example, when investors are optimistic about the future market prosperity, they can allocate some funds in a timely manner to the investment targets related to the VIX index. Once an unexpected event occurs in the market and impacts the original investment plan, the hedging position of the VIX could make up for some of the losses.
Figure 1 shows the trend of the VIX index during the outbreak of the COVID-19 in 2020. It can be seen that the VIX index has risen rapidly.
*The chart is taken from MacroMicro.
Figure 2 shows the trend of the same event of the S&P500. The S&P500 plummeted obviously, which is the opposite of the S&P500 trend.
*The chart is taken from MacroMicro.
Epilogue & Reminder
However, because the investments related to the VIX index involve more advanced investment targets such as options and futures. If you are just starting to invest or have limited funds, it is not recommended to invest rashly. When thinking about investment strategies, you should keep in mind the principle of high returns and high risks properly.
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Disclaimer: Information above can only be use for references and doesn’t represent our platform’s opinions.
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