The fear gauge: a costly way to bet on rising risk

Retail investors got more than they bargained for when they placed their bets on the fear gauge.

Twenty-five years ago, a Bob Dylan-loving finance professor called Robert Whaley moved to a tiny village in Burgundy, France, to spend six months "laying the groundwork for the finance industry's most popular representation of terror", says Robin Wigglesworth in the Financial Times. His creation became the Chicago Board Options Exchange Volatility index (Vix), sometimes described asWall Street's "fear gauge".

At its simplest, the Vix is essentially a mathematical measure of how sharply investors expect markets to move, calculated based on the price of options on the S&P 500. However, the index has evolved from being a simple barometer of market conditions to being a complex multi-billion-dollar market in its own right. There is now an extensive range of financial derivatives based on the value of the Vix that are intended to allow investors to bet on rising or falling volatility, including exchange-traded products (ETPs) that are available to retail investors.

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