{"id":8388,"date":"2024-04-16T19:30:49","date_gmt":"2024-04-16T19:30:49","guid":{"rendered":"https:\/\/economicherald.net\/?p=8388"},"modified":"2024-04-16T19:30:49","modified_gmt":"2024-04-16T19:30:49","slug":"the-vix-or-fear-index-has-spiked-again-heres-why-investors-shouldnt-panic-just-yet","status":"publish","type":"post","link":"https:\/\/economicherald.net\/?p=8388","title":{"rendered":"The VIX or Fear Index has spiked again. Here\u2019s why investors shouldn\u2019t panic just yet"},"content":{"rendered":"<p>The fear gauge or VIX index has spiked in last two days<br \/>\nWhat is the VIX index and what does it tell us?<br \/>\nHow to track the VIX Index on the ASX<\/p>\n<p>\u00a0<\/p>\n<p>Wall Street\u2019s <strong>CBOE VIX Index<\/strong> has jumped to levels unseen this year.<\/p>\n<p>The Index spiked by almost 15% on Friday, and 11% more on Monday, as US traders weighed the possibility of less Fed rate cuts and the prospect of a direct conflict between Iran and Israel.<\/p>\n<p>On a year to date basis, the\u00a0Index is currently up by 45% \u2013 much lower than the 80% spike we saw in 2022 but still something that investors should be concerned about.<\/p>\n<p>\u00a0<\/p>\n<h2>VIX Index has spiked recently<\/h2>\n<p>\u00a0<\/p>\n<p><em><strong>Source: Google<\/strong><\/em><\/p>\n<p>\u00a0<\/p>\n<p>Often called Wall Street\u2019s <strong>\u201cfear gauge\u201d<\/strong>, the VIX (short for volatility index) essentially predicts how volatile S&amp;P 500 stock prices could be in the next 30 days.<\/p>\n<p>High levels of volatility are typically associated with fear, and the moniker \u201cfear index\u201d is used because it is seen as a gauge of investors\u2019 anxiety or apprehension about the market.<\/p>\n<p>The VIX index is also inversely correlated with the stock market, ie; when the VIX goes up, stocks tend to decline.<\/p>\n<p>\u00a0<\/p>\n<h2>VIX is inversely correlated with stock market\u2019s return<\/h2>\n<p><em><strong>Source: Google<\/strong><\/em><\/p>\n<p>\u00a0<\/p>\n<p>In general, when the US VIX index is at<strong> 12 or lower<\/strong>, the market is considered to be in a period of <strong>low volatility.<\/strong><\/p>\n<p>From <strong>20 to 30<\/strong>, the market is thought to be experiencing <strong>high volatility<\/strong>, while a VIX reading <strong>above 30<\/strong> is viewed as a signal of\u00a0<strong>increased uncertainty and risk<\/strong> in the market.<\/p>\n<p>At the current level of 19, the Index is telling us that we are far from where we need to start panicking.<\/p>\n<p>\u00a0<\/p>\n<h2>How is the VIX Index calculated?<\/h2>\n<p>In short, the CBOE (Chicago Board of Exchange) calculates the VIX Index by <strong>implying volatilities from existing options prices<\/strong>.<\/p>\n<p>To calculate it, the exchange compiles near-dated S&amp;P 500 index options (both calls and puts) which are expiring in the next 30 days.<\/p>\n<p>A volatility figure can be implied from each option price, as volatility is one of the inputs to the option pricing model (the Black-Scholes model).<\/p>\n<p>The volatilities of these options would then be aggregated and averaged into one simple VIX index number, which is essentially\u00a0the market\u2019s expectations of volatility in the market.<\/p>\n<p><em><strong>To get more in the detail of the calculations, read here: <a href=\"https:\/\/stockhead.com.au\/primers\/the-fear-index-aint-as-bad-as-it-sounds-heres-a-way-to-trade-and-profit-from-volatility\/\">The \u2018Fear Index\u2019 ain\u2019t as bad as it sounds. Here\u2019s a way to trade and profit from volatility<\/a><\/strong><\/em><\/p>\n<p>\u00a0<\/p>\n<h2>Does the ASX have its own VIX Index?<\/h2>\n<p>Yes, the S&amp;P\/ASX 200 VIX is under the ticker <a href=\"https:\/\/www.asx.com.au\/investors\/learn-about-our-investment-solutions\/indices\/types\/s-p-asx-200-vix-index\" target=\"_blank\" rel=\"noopener\"><strong>ASX:XVI<\/strong><\/a>.<\/p>\n<p>The XVI is up by around 1% this year, which reflects the resilience of Australian stocks in the face of global events.<\/p>\n<p>\u00a0<\/p>\n<h2>The ASX\u2019s own VIX Index, called the XVI<\/h2>\n<p><em><strong>Source: Google<\/strong><\/em><\/p>\n<p>\u00a0<\/p>\n<p>The ASX has defined the ASX 200 XVI reading as follows:<\/p>\n<p>XVI below 15 \u2013 low volatility, bullish market<br \/>\nXVI from 15 to 20 \u2013 more volatility ahead, but still a slight bullish bias<br \/>\nXVI above 20 \u2013 bearish, more uncertainties and risks in the market<\/p>\n<p>At the current level of 11, the Index is telling us that we are in fact on a bullish trend.<\/p>\n<p>\u00a0<\/p>\n<h2>How should investors use the VIX index to make decisions?<\/h2>\n<p>The answer depends on your risk tolerance levels, and how each perceives the risk\/reward proposition.<\/p>\n<p>Investors who have a high risk tolerance might be comfortable with buying stocks when the market is volatile, hoping to catch a spike. This however comes with obvious risks.<\/p>\n<p>Institutional investors often use the VIX index to help with asset allocation decisions, moving funds from equities to cash when the VIX Index is high, and vice versa.<\/p>\n<p>\u00a0<\/p>\n<h2>Can we make money from trading the VIX Index?<\/h2>\n<p>Yes, but only for those who are comfortable with trading in derivatives or Option contracts.<\/p>\n<p>Traders can profit from fluctuations in volatilities by buying and selling Options.<\/p>\n<p>In general, the higher the Implied Volatility of an option (for both calls and puts), the higher the value of the option and vice versa.<\/p>\n<p>By buying and selling options before they expire, traders can capture and monetise volatility in the market.<\/p>\n<p>\u00a0<\/p>\n<p>\u00a0<\/p>\n<p><span class=\"et_bloom_bottom_trigger\"><\/span><\/p>\n<p>The post <a href=\"https:\/\/stockhead.com.au\/primers\/the-vix-or-fear-index-has-spiked-again-heres-why-investors-shouldnt-panic-just-yet\/\">The VIX or Fear Index has spiked again. Here\u2019s why investors shouldn\u2019t panic just yet<\/a> appeared first on <a href=\"https:\/\/stockhead.com.au\/\">Stockhead<\/a>.<\/p>","protected":false},"excerpt":{"rendered":"<p>The fear gauge or VIX index has spiked in last two days What is the VIX index and what does it tell us? How to <a href=\"https:\/\/economicherald.net\/?p=8388\" class=\"read-more-link\">[more&#8230;]<\/a><\/p>\n","protected":false},"author":0,"featured_media":8389,"comment_status":"","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[4],"tags":[],"class_list":["post-8388","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-finance"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.4 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>The VIX or Fear Index has spiked again. 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