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Thoughts About VIX

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January 07, 2009 – Comments (0)

I first heard about VIX during the current market crash: normally at 25, it went up to nearly 80. I began watching it. Right now, I am still not sure what to make of it, but this is what I have so far.

VOLATILITY INDICATOR – well, this is actually the name of this option. The higher it goes, the more volatile stocks are, and potential for big market moves, mostly (but not always) down. True enough: 500+ DJIA swings were associated with VIX in the 70’s

FEAR FACTOR – it indicates how scared investors are. The tenor of financial reporting seemed to match VIX ups and downs.

HEDGE – I have come look at VIX as the collective wisdom (or otherwise) of all options investors. It seems to indicate professional investors using options to hedge their long positions against large losses, i.e. they think the market might tank.

NOT A CRYSTAL BALL – OK, I was hoping that it might help predict the direction of the market, but it does not seem to have that property. However, VIX does reflect some of the underlying forces behind the current (but not future) markets. If it makes a move up, it more likely reflects current market conditions rather than the near future.

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