Vix, the « index of fear » of Wall Street flies to the maximum: what it is and what the markets risk when it is high

The Vix, the index of volatility and fear at Wall Street, flies above 40, for a moment has also exceeded the share of the 45, at the Maximians Intraday from August, reflecting Tensions on markets triggered by Donald Trump’s duties. The term « VIX » is, in fact, for volatility Index and is used on American financial markets to indicate volatility, in particular of the S&P 500 index.

How the VIX index works

It was created by the Chicago Board Options Exchange (Cboe), the largest US options bag. Is calculated in real time based on the prices of the options on the’s & p 500 And he reflects the expectations of investors on future volatility, precisely in the following 30 days. The more the index has a high value, the more investors include important oscillations in shares prices and therefore they expect one situation of uncertainty; On the contrary, if the value is low it means that investors have confidence and suppose there is stability on the markets.

The different values

We enter into the merits of the value. If the Vix stands under 20 It indicates a generally calm market situation. When it is above 30on the other hand, is comparable to a turbulence and therefore panic situation. For example, this is what happens during financial crises. But that’s when The index goes over 40 That the situation is believed to be alarming, because investors consider the markets in a moment of extreme volatility generating uncertainty, fear and numerous risks. This is the current case of the announcement of duties to almost all the countries of the world by the American president Donald Trump.

High Vix: what are the risks?

Speaking of risks, in which one is incurred with the vix above 40? The main is the crosses of the prices of the shares. What is defined may be implemented « Panic Selling »: In a scenario dictated by uncertainty, investors could decide to sell en masse and the natural consequence is the expansion of the losses. Also, it could increase the cost of options (particular type of contract that confers the right but not the obligation to purchase or sell the title on which the option itself is registered). The consequence may be greater difficulty in protecting themselves from risks or speculating without high costs.

Economic crisis

The liquidity is reduced, as happens in moments of high volatility of the markets. Finally, there are more ambly risks that occur with the stretch of times: economic crisis, General collapse of trust in the financial system or a geopolitical event that aggravates the situation. In this case, you enter a vicious circle for which the actions continue to lose, as well as the related assets and derivative tools.