What is Cboe Volatility Index or VIX?
The Cboe Volatility Index (VIX) is a real-time index that represents the market’s expectations for the relative strength of near-term price changes of the S&P 500 Index (SPX), calculated by combining the weighted prices of the index's put and call options for the next 30 days
In simpler terms
It attempts to measure the volatility or "fear index" of the S&P 500 will experience in the short term.
VIX value moves up implying increased investor fears and therefore likely signals that the market is falling and vice versa VIX value will move down implying investors are relatively "stress free" when the market is stable or advances.
I do have to stress that even though VIX and S&P 500 are negatively correlated, they do not have to happen at the same time or day or even back to back days.
How can we use VIX as a signal to buy or sell stocks?
Generally, when VIX is above 30 signals a lot of volatility in the market due to fear and uncertainty but this is rarely sustained for very long therefore it might be good time to buy or go long on stocks in your watchlist as they are likely to have fallen or are falling at an amplified levels due to the uncertainty in the market as a whole
When VIX is below 20 signals shows the market might be reaching a medium top and indicates that the market is stable. This might be a good time to take some profit or close some of your short term positions.
VIX 2008 vs 2020
An interesting VIX comparison found online between the values of the 2008 Great Financial Crisis in blue and today VIX values in white looks eeriely similar. If this turns out to be indicative we might yet to see the largest drop of S&P 500 this year and is likely to be many times more painful then the ones we experienced recently.
To put things into perspective, the extreme days of the 2008 crisis where VIX hits a record 80, the atmosphere of doom and apocalyptic where traders will left standing shell shocked on the trading floor as stocks prices kept plunging in a bottomless pit.
I do hope this won't be a repeat of the 2008 financial crisis, with all the lessons learned and regulations in placed but it is better to be prepared then be taken by surprise if that day ever comes.
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