Finally, Someone Accurately Explains the VIX

by Jay Pestrichelli on March 7th, 2013

I just wanted to share a quick post this afternoon, about an interview I saw on CNBC this morning. I was glad to hear Mark Hulbert, Senior Columnist at MarketWatch, accurately explain how the VIX should be interpreted in the market place. Here’s the video:
We have been delivering this message for years now. The VIX is not really the “Fear Index”. It is, more accurately, a reflection of traders’ willingness to speculate.
The question of why it spikes during a market sell-off can be tied to the fact that down markets move faster than up markets. The put buying comes in a huge wave as quick gains can be made from a short term bear play.  Then eventually, as the market feels it has had enough, the switch from put buying to call buying occurs and brings in a whole new upward support on VIX pricing again. This also pushes the VIX higher and is why a VIX chart looks like the teeth of a shark’s mouth vs. the slower and less volatile chart of any index.
 
Of course at Buy and Hedge, we use the VIX as a proxy for the cost of hedging because, again, it reflects how expensive the options are which we use to buy our protection. See our historical chart on our Resource Page that tracks the cost of hedging.
 
We thank our fellow MarketWatch columnist Mark Hulbert for taking the opportunity to clarify for the masses how the VIX works and not to use it as the indicator to determine the next leg of this Bull market.


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