{"id":27999,"date":"2012-03-06T11:04:13","date_gmt":"2012-03-06T16:04:13","guid":{"rendered":"http:\/\/countingpips.com\/fx\/2012\/03\/06\/understanding-the-vix-indicator\/"},"modified":"2013-11-03T12:15:51","modified_gmt":"2013-11-03T17:15:51","slug":"understanding-the-vix-indicator","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2012\/03\/06\/understanding-the-vix-indicator\/","title":{"rendered":"Understanding the VIX Indicator"},"content":{"rendered":"

Article by Investment U<\/a><\/p>\n

The Chicago Board Options Exchange\u2019s (CBOE) VIX is a term that\u2019s been thrown around a lot lately. Many investors use it as a market-timing indicator, but most of us don\u2019t know what it is or how it works. Let\u2019s take a look\u2026<\/p>\n

VIX is the symbol for the Chicago Board Options Exchange\u2019s volatility index. It\u2019s a weighted mix of the prices for a blend of S&P 500 Index options, from which implied volatility is derived. In laymen\u2019s terms, it measures how much people are willing pay to buy or sell the S&P 500, with a higher volume of options suggesting more uncertainty in the marketplace.<\/p>\n

The VIX Measures <\/strong>Implied<\/em><\/strong> Volatility<\/strong><\/h2>\n

Implied volatility is the expected volatility of the underlying security \u2013 so we\u2019re looking at a wide range of options on the S&P 500 Index. The VIX<\/a> concentrates on the price volatility of the option markets, not the volatility of the index itself.<\/p>\n

If implied volatility is high, the premium on options will be high, and the opposite is true. When investors see options premiums increase, there\u2019s the assumption that we can expect future volatility of the underlying stock index, which represents higher implied volatility levels.<\/p>\n

This VIX is an attempt to quantify fear in the marketplace because it reflects investors\u2019 best predictions of near-term market volatility, or risk.<\/p>\n

Rule of Thumb (usually):<\/strong> The VIX goes up when there\u2019s turmoil in the market, and goes down when investors are quite content or at ease with the economic outlook.<\/p>\n

What to Do With All This Technical Analysis\u2026<\/strong><\/h2>\n

This can get pretty convoluted, so let\u2019s recap:<\/p>\n