UNDERSTANDING THE VIX – THE FEAR INDEX
What is VIX?
VIX is understood in simple terms as the fear index. It is also known as the fear index, as the VIX is dealing with the puts options, rather than the call options. Puts option is sensitive trading because we are trading the stocks that decline their value presently.
The more the number of the puts, the higher will be the VIX or the fear index. The reason is simple. When the stock traders are going for puts, it means they are trying to protect their assets. This situation is happened, especially, when the market is going down. So, when you have the puts, you are safe with the protection that even the stock price goes down that what are holding the contract, you can still sell them off at the better price than the present day market.
Higher VIXVs. Lower VIX
The higher VIX and more depressed VIX are more of the relative. There is so specific limiting point for the low VIX and high VIX. Then how do we say this is more depressed VIX, and the other is higher? Yes, there is a reference point to determine the high and low. The benchmark here is a history of the stock price.
Let us consider the VIX of 50 or VIX of 50 puts. The VIX is determined how fluctuating the stock price graph is. If the volatility of the figure is low like moves in between 30 to 60… with the smaller range and volatility, it is called as low VIX. On the other hand, if the fluctuation is more and so if the volatility of the graph is more, eventually, the VIX is higher. So, the value of the VIX is not dependent on the particular numeric value, but more on the historical VIX or historical level of the stock price. Everything, of course, is to be compared with the current state of the VIX, rather than specific value of the stock.
Reactions to the VIX
As VIX is necessary to be understood, especially, during the put options, it is important to realize what to do when the VIX is high and what to do when the VIX is low. It is simple to comprehend. When the VIX is high, it means when the VIX is fluctuating, concerning the history, it says that it is the right time to buy the stock. In contrary to that, if the VIX is getting lower and lower, it clues us that it is good to look out below. In such cases, we still need to wait for some more time to get the price lower down or the VIX to lower down, from current state or current price of the stock value.
In addition to the above analysis, there is one more thing to consider. Usually, VIX works or function opposite to the stock in the market. The level of VIX depends on the number of puts buys.