FAQ on VIX, the “Fear Index”

Why do they call the VIX the “Fear Index” or “Fear Gauge”
- Because the VIX almost always goes up when the market goes down. The scarier the decline the higher the VIX tends to go. In the worst part of the 2008/2009 bear market it went as high as 80. In Dec 2009 it has been averaging around 22. In strong bull markets it historically bounces between 10 and 15.

How can I buy or short the VIX?
- You can’t. It is a computed index like the Dow Jones Industrial Average, but instead of stocks this index is related to options prices on the S&P500 index (SPX). As the options get relatively pricier the VIX index goes higher. The ETN VXX is attempting to match the VIX at a percentage move basis but they are not attempting to match the VIX value itself.

Is there any way to speculate on the VIX?
- You can buy options and futures on the VIX. I have not done futures trading on the VIX, but I have done VIX options. While not inherently riskier than options on stocks, these options have some unusual wrinkles and characteristics that you should know about. For example the VIX options typically don’t follow the VIX itself all that well on most days–they tend to not drop as rapidly as the VIX index itself, or climb as fast. This can be really frustrating! In addition the “spread” the difference between the cost to buy and to sell is quite high on these options. This is never in your favor–this makes it harder to make a profit.
- There are also two new ETNs (Exchange Traded Note), symbol VXX (~ 1 month) , and VXZ (longer term) that are intended to track the VIX index. These trade like stocks (however sometimes they are hard to short). VXX is not doing a good job of tracking the VIX, it has fallen quite a bit more than the VIX. It is probably only suitable for short term positions. See “How to go long on VIX.”

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