Fear Index

Fear index is the popular name of the Chicago Board Options Exchange’s CBOE Volatility Index(VIX). It is a 30-day forward looking volatility index and is used as a measure for the expected volatility by the market. Volatility is the level of price fluctuations that can be observed in past data. A simple way to gauge it is to look at the standard deviation and variance of past data which tells us how much was the spread. However, the fear index is a measure of future volatility, also known as implied volatility. This is calculated by looking at option prices. A price for a call option on a stock that expires in a month is an indication on the probability and the general expectation of the market for the price of that stock in a month’s time. VIX is constructed using implied volatilities in index options of the S&P Index.

The VIX hit it’s highest intraday level since 2008 on March this year. It had a 280% surge and that is primarily due to the Covid-19 outbreak. However, since then it has settled down to almost pre-Covid levels. The VIX provides a direct way to cash in from the general fear and volatility of the market.