VIX – The Fear Index

November 25, 2008
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I’m not a big investor, so perhaps I’m the last one to know about the VIX, aka The Fear Index.
Wikipedia, the free encyclopedia says:

Although the VIX is often called the “fear index,” a high VIX is not necessarily bearish for stocks. Instead, the VIX is a measure of fear of volatility in either direction, including to the upside. In practical terms, when investors anticipate large upside volatility, they are unwilling to sell upside “call” stock options unless they receive a large premium. Option buyers will be willing to pay such high premiums only if similarly anticipating a large upside move. The resulting aggregate of increases in upside stock option “call” prices raises the VIX just as does the aggregate growth in downside stock “put” option premiums that occurs when option buyers and sellers anticipate a likely sharp move to the downside. When the market is believed as likely to soar as to plummet, writing any option that will cost the writer in the event of a sudden large move in either direction may look equally risky. Hence high VIX readings mean investors see significant risk that the market will move sharply, whether downward or upward. The highest VIX readings occur when investors anticipate that huge moves in either direction are likely. Only when investors perceive neither significant downside risk nor significant upside potential will the VIX be low.

I think the world would be a much better place if we didn’t base our economies on fear wrapped up in alchemical logical structures and emotional triggers. Freemarket seems to mean FreePanicMarket economics. Good stocks fall with bad ones, bad ones rise with good ones. Why? Because there’s movement based on factors and forces that have little or no bearing on what the company is actually doing. Why would people trust their future to such a system? Like I said, I have some stocks, but certainly not enough that would represent my future savings. I like to play, but I’m not suicidal.

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