Options & derivatives
VIX
Also called Fear index
An index of the volatility the market expects in the S&P 500 over the next thirty days.
How it works
The VIX is computed from the prices of index options. Readings around the mid-teens are historically calm; above thirty indicates real stress.
It is strongly negatively correlated with the market, since demand for protection rises as prices fall.
Where it misleads people
The VIX itself cannot be bought. Products tracking it hold futures, which usually cost money to roll, so they lose value steadily in calm markets.
Related terms
- Implied volatilityThe volatility the market is pricing into an option, derived from its premium.
- ContangoWhen futures prices further out are higher than nearer ones, so rolling a position costs money.
- VolatilityHow much an investment’s returns bounce around their average — the standard measure of risk.
- HedgingTaking an offsetting position to reduce a specific risk you do not want.
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