Wall Street's 'fear gauge' poised for longest stretch of subdued readings since 2018 (2024)

FAQs

What is the Wall Street's fear gauge the VIX index? ›

The VIX is calculated based on market pricing for options on the S&P 500. It is designed to be a measure of expected volatility over the next 30 days, and is often referred to as Wall Street's “fear gauge.”

As a rule of thumb, VIX values greater than 30 are generally linked to large volatility resulting from increased uncertainty, risk, and investors' fear. VIX values below 20 generally correspond to stable, stress-free periods in the markets.

As Bowler explained, recession fears, the unwind of the yen carry trade, and other commonly cited causes of the market's early-August plunge served as catalysts for the VIX to spike. He said the jump was greatly exacerbated, however, by the illiquidity of the S&P options that make up the index.

In March 2020, as concerns around the COVID-19 pandemic took hold and its impact on the economy was unknown, the VIX reached an all-time high of 82.69.

Generally, VIX values that are greater than 30 can signal heightened volatility from factors like investor fear and increased uncertainty.

"If the VIX is high, it's time to buy" tells us that market participants are too bearish and IV has reached capacity. This means the market will likely turn bullish and implied volatility will likely move back toward the mean.

According to the rule of 16, if the VIX is trading at 16, then the SPX is estimated to see average daily moves up or down of 1% (because 16/16 = 1). If the VIX is at 24, the daily moves might be around 1.5%, and at 32, the rule of 16 says the SPX might see 2% daily moves.

The VIX is designed to reflect investors' view of future US stock market volatility -- in other words, how much investors think the S&P 500 Index will fluctuate in the next 30 days.

Another reason the VIX isn't a great long-term investment is that the index, unlike equity indexes like the S&P 500 and Dow Jones Industrial Average, tends to regress toward a long-term average, as shown in the chart below.

You decide to open a position to buy the VIX with the expectation that volatility is going to increase. By doing so, you might balance out these positions. If you were wrong, and volatility didn't increase, your losses to your VIX position could be mitigated by gains to your existing trade.

Has the VIX been manipulated? ›

The literature has also documented manipulation in the VIX due to volume spikes on S&P 500 index options used in VIX calculation (Griffin and Shams, 2018) . The evidence of spoofing, where orders are submitted without the intention of execution, can be found in Lee et al.

When price keeps rising, more and more people invest more and more money in stocks. Stock prices follow the law of demand and supply. With higher demand (more money), prices keep rising further and profits grow. Growing profits fuel more greed and more money get invested raising prices to excessive levels.

The Fear & Greed Index is a way to gauge stock market movements and whether stocks are fairly priced. The theory is based on the logic that excessive fear tends to drive down share prices, and too much greed tends to have the opposite effect.

Interactive historical chart showing the daily level of the CBOE VIX Volatility Index back to 1990. The VIX index measures the expectation of stock market volatility over the next 30 days implied by S&P 500 index options. The current VIX index level as of September 09, 2024 is 19.45.

As can be seen from the image below, when the VIX tends to spike, the SPY tends to fall , indicating fear may be rising in the market. In other words, a higher VIX indicates fear, a lower VIX indicates confidence.

When the VIX is high, volatility is usually a time when the market is gripped by fear. The VIX generally rises when stocks fall and declines when stocks rise. Buying when the VIX is high and selling when it is low is a strategy but one that needs to be considered against other factors and indicators.

The VIX index measures volatility by tracking trading in S&P 500 options. Large institutional investors hedge their portfolios using S&P 500 options to position themselves as winners whether the market goes up or down, and the VIX index follows these trades to gauge market volatility.

It means investors expect prices to fluctuate in the range of +15 and -15 in the next thirty days. Theoretically, VIX oscillates between 15 and 35. Any value around or below 15 represents low volatility against values higher than 35, which indicate high fluctuations in the market.