Making Sense of the VIXWhat is the VIX and why is it relevant to investors?
The Volatility Index, known as the VIX or FEAR index, helps measure how much the stock market might swing in the future. It looks at options prices on the S&P 500, hinting at how investors feel and what they expect in the market.
1. Checking Risk:
The VIX tells us how unsure or risky the market might be. A high VIX means more ups and downs, suggesting possible market drops or significant price changes. Traders and investors use this to see how much risk they take and adjust their plans.
2. Protecting Investments:
Large investors use the VIX to make plans that protect their investments. When the VIX is high, they might buy certain types of contracts to reduce potential losses if the market drops.
3. Deciding When to Buy or Sell:
Some people use the VIX to decide when it’s an excellent time to jump into or out of the market. If the VIX is high, it could be a chance to buy stocks at lower prices. If it’s low, it might mean the market is too high and could go down soon.
4. Trading on Volatility:
Some traders focus on the ups and downs of the VIX itself. They use special contracts tied to the VIX to try and make money from short-term changes in its level.
5. Contrarian Investing:
Contrarian investors often take positions opposite to the prevailing market sentiment. If most investors are optimistic and buying, contrarians may be more inclined to sell or short the asset. Conversely, if most investors are pessimistic and selling, contrarians may see it as an opportunity to buy. Successful contrarian investing requires patience and discipline.
In simple terms, the VIX is like a weather forecast for the stock market. It helps investors know if it will be calm or stormy so they can plan accordingly.
What is the VIX telling us now?
The global geopolitical lanscape has been deteriorating steadily over the past few years and the Volatility Index has collapsed to its pre- Covid price level. That’s what we call a bargain.
