The VIX is the acronym standing for the CBOE volatility index. In simple terms, it is a number which represents the current volatility of the stock market. There are times which the stock market seems stuck in a narrow range and only moves a tiny fraction day to day. During these times, the VIX is towards its lows which are generally between 12 and 15. Conversely, there are times — like now — when the stock market is a virtual roller coaster shooting up and down in the most violent of fashions. In times like these, the VIX shoots up to its high range which is above 40. During the peak of the meltdown of 2008 when Lehman Brothers imploded the VIX shot all the way up above 90 — this was an even of historic proportions.
The VIX is also referred to as the “fear index” because it greatly rises when fear is in control on Wall Street. The calculation for the VIX relates to the size of premiums assessed to stock options. In scary times, investors rush to buy puts as protection against market plunges. Increased demand for puts drives up their prices hence results in an increased VIX. When the VIX starts to rise, smart investors take that as a signal of impending doom. The VIX rose sharply prior to the debacle in 2008, and smart investors took that queue in time to escape huge losses. Anyone who trades stocks should keep their eye on the VIX — it is often the canary within the stock market coal mine.