Stock Market 'Fear Index' Rises
Here at The Ticker, we like to take you behind the well-known numbers and show you some of the less sexy but very meaningful numbers that rule the markets.
Today, we revisit the VIX -- the Chicago Board Options Exchange Volatility Index -- which is known as the "fear index."
The VIX is a measure of the price volatility of stock options for shares that trade on the S&P 500.
Traders use options to hedge against future losses. When traders see a volatile market -- a 5 percent jump one day, a 3 percent drop the next -- the price of options rises and the VIX climbs.
When the markets do not fluctuate as much, the VIX drops, as traders see smoother waters ahead and start to feel good again about stocks.
Traders like the VIX to be below 30. Back when we last checked in with the VIX, it had dipped below 30 for the first time since Lehman Brothers collapsed in September. During the November market free fall, the VIX spiked in the 80s, as the markets were swinging wildly.
Today, the VIX climbed back above 30 for the first time since June 4.
At least one trader today placed a nearly $1 million bet that the VIX will rise above 45 by July, buying several thousand option calls. That trader won't make money unless the VIX increases by 50 percent in a month, which would make for a volatile, and probably diving, market.
Last month, we talked about keeping your eye on your investments during the summer, anticipating a July pullback. A rising VIX may point the way.
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