Volatility Index (VIX)
Master the "Fear Gauge." Learn how to use market volatility to time entries and manage systemic risk.
Market Internals
Risk Management
Advanced
What is the VIX?
The Volatility Index (VIX) measures the market's expectation of future volatility, derived from the pricing of index options. Essentially, it tracks how much traders are willing to pay to protect themselves against market swings. When the VIX is low, the market is complacent; when it is high, the market is in a state of fear or panic.
The Inverse Relationship
The VIX typically has an inverse relationship with the stock market:
- When the Market Rallies: The VIX tends to drift lower as confidence increases.
- When the Market Crashes: The VIX spikes aggressively as market participants rush to buy put options for protection.
Strategic Use
Use the VIX as a "contrarian" signal for market regime shifts:
- VIX Spikes: Extreme VIX spikes often mark "capitulation" points—where the last remaining sellers have exited, often forming a durable market bottom.
- VIX at Lows: An exceptionally low, flat VIX is a warning sign of excessive complacency. It often precedes a "sudden volatility expansion," meaning a sharp, unexpected market move is coming.