Like many things on Wall Street, the VIX Index is widely misunderstood.
It’s actually not a measurement of VOLATILITY. Volatility is a mathematical measurement of the past.
The VIX is a mathematical measurement of IMPLIED VOLATILITY. Implied volatility is a measurement of PREDICTIONS of future volatility.
It’s a measure of how much traders and portfolio managers are willing to pay for INSURANCE just in case they are wrong.
The VIX is widely referred to as the “FEAR” Index. This is because the VIX moves higher because traders pay bigger premiums for insurance to protect themselves from a move lower.
But the VIX could also be referred to as the “EUPHORIA” Index. In this case the VIX moves higher because traders pay larger premiums for insurance to protect themselves from missing a move upwards.
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