One trading indicator that is very popular during moments of market uncertainty is the CBOE Volatility index, which is sometimes known as Vix or even called the “fear index”. Vix is calculated from the price of 30-day call and put options on S&P 500 futures traded on the Chicago Board Options Exchange.
Call options give you the right, but not the obligation, to buy a specific asset at a set price at a set time, while put options give you the right to sell. In other words, it gauges the cost of taking out insurance against price moves in either direction: the greater the cost, the bigger the implied volatility. The index’s long-term average is around 21.
However, while the formula for working out Vix is pretty straightforward, traders don’t agree on how to interpret it. The simplest view is that the higher the Vix, the more volatility traders expect, and the more you should think about selling. However, contrarian investors argue that a high Vix can be a sign that people may be too cautious, which in turn suggests that it is time to buy.
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