The VIX is known as the fear index because it is based on the amount of puts that are purchased.
Why?
-The more puts that are purchased on the SP500, the higher the VIX
-When puts are high that means people are buying protection
-They think the market is going down
High v. Low VIX
-High VIX versus low VIX is relative
-It depends whether you’re looking at historical or implied relativity, a high VIX can’t necessarily be determined by its numerical value
-The implied VIX is the state that you are currently in
-Remember: when the VIX is high, it’s time to buy; when the VIX is low, look out below
-The VIX works opposite of the market (but it’s not always 1:1)
-When the VIX is high, stock prices go down because fear impacts selling to the negative side
-When the VIX is low, stock prices start to increase because there is less fear, which means stocks will eventual tumble
-It shows you how much protection people are buying with the puts
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