VIX is a volatility index which measures the 30-day expected volatility (standard deviation) of the S&P 500. It is calculated from the near-term and next-term out-of-the-money call and put options for the S&P 500. There is negative correlation between the VIX and the S&P 500. As the market trends up VIX moves lower, when the market turns donw volatility and the VIX increases. This is because declining stock market carries more risk and higher implied volatility. Investors hedge their long positions with put options, the demand for put option increases.
VIX with this unique relationship with the S&P 500 and the stock market helps us to look for clues and confirmations for market movements. Declining and flat VIX indicates that investors don’t worry about the near future. Occisional spikes indicate declines when implied volatility increases.
As we look at the chart for VIX, it is noticably moving up. This means that investors are looking for more protection aginst market decline. Is it short-term or intermadiate-term, we will find out.