VIX index was created by Chicago Board Options Exchange (CBOE) in order to provide a measure of stock markets expected volatility in 30-day period. It is also known as fear index or fear gauge. It is calculated using implied volatility of SP500 options. Thus, the index is forward looking as it measures expected volatility in the market quoted in percentage points. As leading indicator, VIX reflects investors sentiment but is not perfect. In 2004 VIX futures were introduced and VIX options in 2006.
Through history, a VIX below 20% indicates healthy and moderately risky market. Extremely low index can indicate a bearish sentiment among investors. A VIX higher than 20% signals increased fear and high risk market. During the 2008 Financial Crisis, VIX came above 50%, reaching the highest 85%. Thus, market expected prices to fluctuate 505 either side in 68% of the time. However, extreme percent does not persist as investors take positions to reduce the risk.
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