What is the volatility index?

Commonly referred to as “the VIX”, it is a gauge of market fear. It is a measure of expected S&P 500 volatility in the next 30 days. For instance, if the VIX is measuring in at 21, that means the market expects a (annualized) 21% change in the next 30 days. The higher the VIX goes, the more (inferred) fear there is in markets.

How does the VIX measure Market Volatility? 

Volatility is simply a measure of historical price fluctuations. Easy enough. It’s easy to see historical price changes. But how does one predict volatility for the future? You have to look at call options and put options. For a simple definition that is not boring (it does mention a “thong leotard”) read here: What is a Call Option?

How does the VIX Measure Fear?

When the market surges violently in one direction or another—it typically suggests fear. Either a fear that there will be large sustained losses—or fear of missing out on gains/not being able to recoup losses. As the saying goes, fear and greed drives all markets.