The VIX (CBOE Volatility Index®), or "investor fear gauge", measures market expectation of near-term volatility, as conveyed by a range of S&P 500 index option prices (both calls and puts). It is, essentially, the price of buying options in order to protect stocks.
A high VIX value is seen as a greater degree of market uncertainty, while a low value reflects greater stability. As the graph below shows, when the VIX goes up, the stocks go down (S&P, Dow, NASDAQ). Conversely, when the VIX goes down, the stocks go up. Hence, an investment in iPath S&P 500 VIX Short-Term Futures exchange traded notes (which track VIX futures) can act as a bearish hedge.
Other volatility indexes: VXN tracks the NASDAQ 100, VXD tracks the Dow Jones Industrial Average, and MVX tracks option prices on the S&P/TSX 60 index ETF. Note that Vicks is another thing entirely.
A couple of questions arise:- Q: Are rising volatilities almost always a precursor to falling stock prices, as the market wizard stated in Steven Sears' Barron's article, or are falling stock prices the cause for rising volatilities?
A: Yes.
- Q: What is the relationship between VIX and Viagra?
A: With all due respect, it seems that the markets do just fine without Viagra, in particular when the VIX comes down.
What's the relationship between the VIX and beer and fries (and perhaps globalization), that's what I'd like to know...
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