Buckle your seatbelts for an action-packed year. It’s almost like 2011 is leaving us like the cliff-hanger ending of an old comic strip—can Europe be saved? Can the euro survive? Will deflation engulf the world? Stay tuned for the next episode… But oddly enough, despite the litany of unknowns facing the global economy, the Chicago Board Options Exchange Volatility Index, also known as The VIX, otherwise known as the Fear Index, has been showing signs that the market is actually feeling a little more soothed than normal.
The VIX measures volatility by tracking the prices of options on the S&P 500 index. Just as insurance is more expensive for drivers with histories of accidents and citations, options become more expensive when market volatility increases. Traders use the VIX to determine market expectations of the amplitude of future market swings, in both directions. When the VIX is high, market anxiety is high, and the probability of a big swing in the market becomes more likely.