What is VIX or Volatility Index?

The VIX or Volatility Index, known by its ticker symbol ^VIX, is a notable measure of the stock market's expectation of volatility over the next 30 days. It is calculated by the Chicago Board Options Exchange (CBOE), and is colloquially referred to as the "fear index" or "fear gauge".

An increase in the index indicates that investors are expecting higher levels of volatility in the market, while a decrease signals lower levels of expected volatility.

The VIX is not a traditional market index, such as the Dow Jones Industrial Average (DJIA) or S&P 500, which measures the performance of a basket of stocks. Instead, it uses options data to calculate expected volatility.

When the VIX is high, it means that investors are expecting a higher degree of volatility in the markets. When the VIX is low, it means that investors are expecting less volatility.

The VIX can be used as a tool by traders to measure market sentiment and make decisions about their trading strategies.

There are a number of ways to trade the VIX, including buying and selling futures contracts, options on the VIX, and exchange-traded products (ETPs).

Some common strategies used by traders include:

* Buying VIX calls when they expect increased market volatility.

* Selling VIX calls when they expect decreased market volatility.

* Buying VIX puts when they expect a decrease in the stock market.

* Selling VIX puts when they expect an increase in the stock market.

* Trading VIX ETPs, which are designed to track the movements of the VIX.

Can you invest in the VIX?

Yes, you can invest in the VIX through a number of products, including futures contracts, options, and exchange-traded products (ETPs).

How do you make decisions based on VIX?

To stay on top of the market, specialists rely on a wide range of data sources and tools. The VIX is one of the most important indicators for anticipating when the market may move up or down significantly or when it might be ready to calm down after a period of volatility.

Through the viewpoint of mean reversion, experts understand what the VIX is attempting to communicate. Mean reversion is an important idea in finance that implies asset prices generally stay near to their long-term averages. The principle of mean VERSION says that if prices increase a lot quickly or plummet a great deal, they should revert back to their long-term average price level over time.

This idea is what drives a great deal of the trading strategies used by market participants.

When the VIX is low, it might indicate that the stock market is due for a correction (a decrease in prices). When the VIX is high, it might signal that the market has been experiencing a lot of volatility and is due for a period of calm.

Some traders might buy VIX calls when the index is low, expecting market volatility to increase. Others might sell VIX puts when the index is high, betting that market volatility will decrease.