The volatility index, also referred to as the VIX, primarily takes a studying of the inventory market’s blood strain, measuring traders’ worry.
The VIX can spike when investor issues are heightened by occasions just like the elevating of rates of interest by the Federal Reserve or the Covid-19 pandemic.
“It is only a distinctive software that we are able to truly quantify that [concern],” Lindsey Bell, chief markets and cash strategist at Ally Monetary, instructed CNBC.
The VIX is a forward-looking index that weighs volatility based mostly on buying and selling in S&P 500 choices.
“It is measuring implied volatility over the subsequent 30 days, and that is derived from choice exercise,” mentioned Jason Snipe, founder and chief funding officer at Odyssey Capital Advisors. “That is the catalyst for what strikes [the VIX] in both route.”
Traders can use the VIX to assist them make shopping for and promoting selections, or they’ll not directly spend money on it.
“A very powerful factor is having a plan for no matter you’re investing for, whether or not you’re a dealer or an investor,” mentioned Tiffany McGhee, chief funding officer and CEO of Pivotal Advisors.
Watch the video above to be taught extra about how the VIX measures worry, the mechanics behind implied volatility and why it issues to investor portfolios.
SIGN UP: Money 101 is an 8-week learning course to financial freedom, delivered weekly to your inbox. For the Spanish model Dinero 101, click here.
Disclosure: NBCUniversal and Comcast Ventures are traders in Acorns.