What is Volatility Index?

Forbes warned that we should look beyond the volatility index,

Many investors make the mistake of not looking beyond the CBOE Volatility Index, known as the VIX, in their assessment of volatility and by extension, market risk. But the VIX is just a gauge of equity risk. Any market with traded options has its own set of volatility. Interest rate volatility is Davis’ focus. By any measurable standard – and there are four – interest rate volatility is at all-time lows.

Other surprises could lead to a spike in volatility. Once investors anticipate surprises, they are no longer surprises. Allocations to “long volatility” products beyond the VIX can help insure portfolios for when the surprises do come – and come they will. They always do.

“People don’t expect anything to happen, other than for them [the Fed] to continue to cut,” Davis says. But there are any number of events that can upend central bank expectations in the U.S. and elsewhere. One scenario is a trade war – not with China, but with Europe after Britain leaves the EU. Read more…

In order to understand how traders and investors are “sensation” relating to the marketplaces in the near future, one ought to constantly take a look at the “Fear Index” or the VIX. The VIX is the symbol for Chicago Board Options Exchange Volatility Index. What this does is determines the movement of each of the significant markets. To put it simply, when the VIX goes up, volatility (the movement of stocks/options) is up. It is that easy. Now, why does this make it the “Fear Index”? Well to keep it basic, when individuals are afraid in the markets they tend to sell or trade more than regular for this reason the VIX increases. Sell-offs can increase VIX significantly.

The issue with the VIX increasing is that the volatility increases the risk for investors (Individuals that don’t trade more than 4 times a week). The VIX increasing only is useful for DAY TRADERS (Those that trade stocks/bonds/Options/ ETF’s several times a day throughout market hours) due to the fact that you have the ability to buy/sell throughout its ups and downs throughout the day. Financiers on the other hand (for instance: If you have a retirement plan, you are a financier) you are at threat indefinitely because your goal is long term gain with hardly any trades in the short term (particularly when most retirement plans are mutual funds ONLY). Nevertheless, there are methods for financiers to be extra mindful when the VIX goes up such as buying in the markets when it dips listed below 1%, purchasing PUTS (please see the previous short article on this topic), and putting trailing stops on the individual financial investments. These might sound basic adequate but it will assist in saving you from a significant loss. Another financial investment you can do is precious metals. Gold tends to do exceptionally well when the VIX is up (when there is worry, investors put their money into reasonably safe, set earnings and/or inflation safe type of investments such as Gold and precious metals). This is not always the case nevertheless history has actually revealed this to be precise.

If you are a day trader, you want the VIX up as much as possible. One thing is for sure when you feel comfy with the VIX you can do some really accurate predictions where the markets in basic are going!

In order to understand how traders and financiers are “feeling” regarding the markets in the near future, one needs to always look at the “Worry Index” or the VIX. Well to keep it simple, when people are fearful in the markets they tend to sell or trade more than normal hence the VIX goes up. There are methods for financiers to be extra careful when the VIX goes up such as purchasing in the markets when it dips below 1%, purchasing PUTS (please see previous post on this subject), and putting tracking stops on the specific financial investments.

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