The VIX index (officially known as the Chicago Board Options Exchange Market Volatility Index), developed by CBOE in 1993, is calculated based on the implied volatility of call and put options on the S&P500 index (SPX) over a 30-day period.
The theory behind the volatility index is that if investors believe the market is going to decline, they will hedge their portfolios by buying puts (the right to sell an asset at a predetermined price before a specific expiration date). Conversely, if traders are bullish, they may not want to hedge against potential downturns. This index shows a negative correlation with the S&P500.
When there is high volatility, the VIX reaches high values and is often accompanied by declines in the S&P500, indicating fear and pessimism in the market. These events often lead to significant movements in the stock markets. Conversely, when the VIX is at lows, there is confidence in the market and movements are smoother.
Relevant VIX levels:
VIX<20: Investor confidence. Often coincides with bullish periods for the S&P500.
20<VIX<30: Moderate market concern, some volatility. Indicates uncertainty. The upward trend in the S&P500 may continue, but a reversal is also possible.
VIX>30: Increased investor pessimism or fear. High volatility and the potential for significant downward corrections in the prices of the S&P500 and major stock indices.
The theory behind the volatility index is that if investors believe the market is going to decline, they will hedge their portfolios by buying puts (the right to sell an asset at a predetermined price before a specific expiration date). Conversely, if traders are bullish, they may not want to hedge against potential downturns. This index shows a negative correlation with the S&P500.
When there is high volatility, the VIX reaches high values and is often accompanied by declines in the S&P500, indicating fear and pessimism in the market. These events often lead to significant movements in the stock markets. Conversely, when the VIX is at lows, there is confidence in the market and movements are smoother.
Relevant VIX levels:
VIX<20: Investor confidence. Often coincides with bullish periods for the S&P500.
20<VIX<30: Moderate market concern, some volatility. Indicates uncertainty. The upward trend in the S&P500 may continue, but a reversal is also possible.
VIX>30: Increased investor pessimism or fear. High volatility and the potential for significant downward corrections in the prices of the S&P500 and major stock indices.
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