The Volatility Index Chart (VIX) & utilizing it for strategic stock trading

What is the Volatility Index?

  • The Volatility Index, or VIX, measures volatility in the stock market.
  • The Chicago Board of Options Exchange (CBOE) creates and tracks an index known as the Volatility Index (VIX), which is based on the implied volatility of S&P 500 Index options.
  • Traditionally, smaller investors look to see where institutions are accumulating or distributing shares and try to use their smaller scale to jump in front of the wake—monitoring the VIX isn’t so much about institutions buying and selling shares but whether institutions are attempting to hedge their portfolios.
  • It is important to remember that these large market movers are like ocean liners—they need plenty of time and water to change direction. If institutions think the market is turning bearish, they can’t quickly unload the stock. Instead, they buy put option contracts or sell call option contracts to offset some of the expected losses.
  • The VIX helps monitor these institutions because it acts as both a measure of supply and demand for options as well as a put/call ratio.

How to use the Volatility Index for Trading

  • The Volatility Index or the VIX is somewhat useful in navigating the S&P 500. 
  • When the VIX is low, volatility is low. When the VIX is high volatility is high, which is usually accompanied by market fear.
  • Historically, during this inflationary bear market, the VIX has bottomed at S&P 500 tops and has topped at S&P 500 bottoms.
  • Buying when the VIX is high and selling when it is low is a strategy, but one that needs to be considered against other factors and indicators.