What is the fear indicator? -VIX

 What is the fear indicator? .. VIX

fear index

The VIX Fear Index is an indicator that measures real-time stock market volatility and represents the opinions of financial professionals about the strength of market conditions over the next 30 days. To measure the level of risk or fear present in the market before making an investment decision.

Although many investors use this index to measure the market in a general way, it only relies on calculations based on the S&P 500 index in particular because this index includes more than 500 international companies and is therefore a good indicator of the overall market performance of stocks.

It is worth noting that an increase in the VIX index means that there are expectations of significant price changes in the near future, and thus more volatility.

What does the VIX measure?

The VIX fear index looks ahead and seeks to predict the volatility of future market movements, this is different from actual volatility in which volatility that has already occurred is measured by the market.

This means that this indicator measures future volatility, and it is among the important indicators because it depends on the amount of investors’ willingness to pay for the right to buy or sell shares, and it is also used to estimate the size of the expected level of risk in the market within thirty days. The higher the perceived market risk, the greater the willingness Investors have to pay for “insurance” in the form of options.

When investors anticipate significant rises or significant declines in share prices, they often look to reduce risk by using options to “hedge” their positions. Buy an option.

How is the VIX index analyzed?

Generally when the VIX index year is up, the investor expects the S&P 500 price to go down and vice versa, so the VIX price can basically be a layman’s guide to what financial investors think of the market for the next month. Here’s how the fear index numbers are interpreted:

  • 0-15 Low Volatility: Usually indicates a lot of optimism in the market.
  • 15-25 Medium Volatility: Prices in this range usually indicate a normal market environment where there are some changes to expect, but nothing to be terribly afraid of.

  • 25-30 High Volatility: This indicates a growing concern in the market with no confidence in the market.
  • 30+ Very high volatility: Generally when the index exceeds 30, it indicates that very big changes are expected and severe turbulence awaits the market.

How does the investor benefit from the fear indicator?

  • When there is a rise in the VIX index, it means that traders in the S&P 500 options market are expecting an increase in market volatility.
  • The higher the VIX index, the greater the fear of a decline in stocks, and this indicates that there is an opportunity to buy, and vice versa, when the index goes down, it is expected that the stocks will rise.

Can you trade on the fear indicator?

The fear index cannot be traded as it is an indicator that only predicts upcoming market volatility, but ETFs that track and mirror the VIX can be traded, which can be traded Many ETFs and ETFs carry additional risk through their built in leverage and cost structure corrosive.
Items considered when calculating the VIX index
While calculating the “vix” fear index, four main elements are taken into account. These elements include:
  • expiration time
  • interest rates
  • forward index level
  • offer request.
Expiry Time: Instead of taking days to calculate the expiry time, it is calculated in minutes to achieve the level of accuracy that traders expect.
Interest Rate: While considering the risk-free interest rate for the expiry months of the options contracts, the relevant holding rate of 30 to 90 days is taken into account and the risk-free interest rate is considered.
Forward Index Level: The money options contract which is considered while calculating the volatile index is determined by using the index futures level, the strike of the money price which helps in determining the said options contract is determined by this index futures level, therefore, the index futures level plays an important role in the VIX account.
Bid and Ask: The bid and ask prices for options contracts are taken into account while calculating the VIX index.
Why do investors prefer to use the Fear Index?
The VIX is a popular choice among traders because it helps them analyze different markets, diversify their portfolios, hedge them, and speculate on price movements, as several instruments can be linked together in the VIX index.
The importance of the VIX fear index
This indicator helps investors understand the expected change and direction in the markets, and is especially important for people who deal in options and futures.
In the pre-COVID-19 period, the normal range for the index remained below 30 since 2014, however, since the outbreak of the pandemic, the VIX has crossed the 30 levels and has been trading near 50 and even 80 for a significant period.
Proper analysis of the VIX and current economic trends can help to understand the course of the market, so anyone with a large investment in stocks should monitor the movement of this index and adjust their strategies accordingly, while short-term fluctuations in volatility may not affect long-term profitability. For long-term investments, if the volatility increases in the long term, investors will need to completely re-evaluate their investment. In general, the VIX fear index plays an important role in determining market sentiment, to understand the current mood of the market.
What happens when the fear index is high?
When the fear index is high, traders expect an increase in the range of stock prices, i.e. a significant change in prices, and this is seen as a sign of increasing uncertainty in the market.