How to Understand the Volatility Index

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The Chicago Board Options Exchange's Volatility Index, also known as the VIX, shows market expectations for S&P 500 index options during a 30-day period of time. VIX was first introduced in 1993 and was extended to include futures trading in 2004.

  • The VIX is used to determine market sentiment, but it doesn't predict which direction prices will head. Some call the VIX, "the fear index." The VIX is a way to gauge whether institutions might hedge their portfolios.

  • A normal reading in the index is between 20 and 30. A reading under 20 typically means that most investors aren't worried and that there are stable times on the market. A reading above 30 is associated with a large amount of volatility.

  • The Volatility Index is used as a contrary indicator. For example, when the VIX spikes to extremely high levels it means that the market could bottom out.

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