The Stock Market Fear Number

Since 1990, the CBOE has issued the volatility index, VIX.  VIX is commonly called the ‘Fear Index’ because it tracks the amount of defensive options being bought at the CBOE.  During times of uncertainy in the market and times when expectations are negative in the short term, many large investors use defensive options to protect their portfolios against these downturns,  these act like insurance policies.  I have linked a graph of the history of this index, which you can notice times of worry.  As investors buy these defensive options the index increases. Notice over the last month this index has shot up higher than it ever has in history.

vix

This represents fears mounting as the selling continues.  The VIX index is thought the give a good representation of short term market expectations.  This post adds to the information we gave in our last post, “Is this Panic Sensible.”  It does answer whether or not it is sensible but only confirms that it is a panic.  In 2006 investors could place bets on the index that measures fear.

To learn more about volatility indexes visit the CBOE site.

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