VIX

In detail

The VIX is the Cboe Volatility Index. It infers, from the prices of S&P 500 index options, how much movement the market expects over the coming 30 days. The figure is annualized and expressed in percentage points, so a VIX of 20 implies an expected annualized move of about 20%. It is called the "fear gauge" because expected volatility rises when investors buy protection, which happens when they are worried. Readings in the low-to-mid teens have historically accompanied calm markets; sustained readings above 30 accompany genuine stress. Three things people get wrong about it. The VIX is not directional — it estimates the size of moves, not which way they go, though in practice it correlates with falling prices because that is when demand for hedges spikes. It is an estimate of what the market *expects*, not a forecast that proves correct. And VIX-tracking products do not track the index itself; they hold futures, which roll, so their long-run return can diverge sharply from the VIX. Holding them as a long-term hedge is a well-documented way to lose money slowly.