Fear index

Fear index definition

The VIX is also called the Fear Index and people misunderstood this to mean that if the VIX goes up, the market MUST go down. If the VIX goes up the market can also go up as the VIX is a measure of perceived volatility in either direction.

This is not true. The VIX is called The Fear Index because portfolio managers fear that because implied volatility is going up, the P/L volatility of their portfolio’s will go up.

When investors anticipate large upside volatility, they are unwilling to sell upside call options in the stock market unless they receive a higher price (option premium) for the option and Option buyers will only be willing to pay higher prices with a corresponding increase in implied Volatility. When the market is believed as likely to soar as to plummet, writing (selling) any Option (Call or Put) will be equally as risky.

Learn how to use the fear index in trading and investing by checking the portfolio management guide.

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