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VIX (Volatility Index)

In short

The 'fear gauge' — measures expected S&P 500 volatility over the next 30 days

VIX is called the 'fear gauge.' When investors are scared, they buy options to protect themselves, which pushes VIX up. VIX above 30 means real fear in the market. Below 15 means complacency. Extreme fear is often a contrarian buy signal.

VIX measures the implied volatility of S&P 500 options over the next 30 days. It's derived from option prices — when investors fear large moves, they pay more for options, raising VIX. VIX and the S&P 500 are historically negatively correlated.

Formula

VIX = Weighted sum of S&P 500 option implied volatilities over 30 days

Thresholds

< 15
Complacency — low fear
15-20
Normal range
20-30
Elevated concern
30-40
High fear — market stress
> 40
Extreme fear — potential capitulation

Related concepts

  • Implied Volatility — Implied volatility is the market's guess about how much a stock will move. High IV means expensive options (the market expects big moves). Low IV means cheap options. Buy options when IV is low, sell when IV is high.
  • Maximum Drawdown — If your portfolio hit $10,000 then fell to $6,000 before recovering, the max drawdown is 40%. It measures the worst experience a real investor would have endured.
  • Portfolio Volatility — Portfolio volatility measures how much your combined investments bounce around. Unlike individual stock volatility, it accounts for diversification — when some holdings go up while others go down, they partially cancel out, reducing overall portfolio risk.
  • Sentiment Score — The sentiment score blends news and social media signals into one number. Think of it as a thermometer for how the market 'feels' about a stock right now. Positive = optimistic; negative = pessimistic.