Volatility Index (VIX)
What is it?
The Volatility Index (VIX) is a complex volatility indicator that has provided by the Chicago Board Options Exchange (CBOE) since 1993. It is based on the S&P 500 put and call options, which are weighted by the time remaining and the extent to which they are in- or out-of-the-money. As the S&P 500 options are the most liquid index options on the CBOE, VIX provides a measure of implied volatility for the broader market. In addition, VIX can be used in any time-frame as the CBOE updates VIX throughout the day.
VIX usually has an inverse relationship to the market with the value of VIX increasing when the market declines and decreasing when the market rises. However, plotting VIX with an inverted scale resolves this dichotomy.
How is it Used?
VIX can be used to anticipate the future direction of the market. When VIX increases, it is generally considered an indication of an increase in bullish activity, while a decrease in VIX is considered an increase in bearish activity.
Some traders use the 20 and 30 lines as reference lines. When VIX is below 20 it is considered extremely bearish, and when VIX is above 30 it is considered extremely bullish.