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Learning to Love the Vix

Friday, 4 Jul 2008 | 8:55 AM ET

I'm a fan of the Vix. Or Vixx ... I've seen it spelled both ways. If you want to ticker it on our site, it's VIX.

"Vix" is shorthand for the CBOE Volatility Index ... and index computed from the number of calls and puts trading hands on the Chicago exchange. For newbies, calls and puts are stock options that allow traders, for a relatively small price, buy or sell specific stocks for a specific price in the future. Traders use them as little insurance policies against their stock bets going really, really sour.

If traders are buying a lot of these insurance policies, then they are apparently really nervous about the market and their bets on it. If they are not going for the insurance, they are thinking things are okay. This makes the Vix index a quick and easy way to measure market jitters.

That's one reason why I'm a fan. I like gauges that take the ephemeral and make it measurable. And we've gone out of our way to make it available to readers ... something I like to toot our horn about vis-a-vis the competition. The Vix is featured on our Pre-Market Page and on our Markets Page to give investors the quick market mood read.

And what is it? Not good lately. Generally the rule of thumb is that a Vix reading over 20 means a nervous market. We've been over 20 for a while now.

Capitalizing on the VIXX
Look at the moving average convergence/divergence of the VIXX for clues on how the following week will trade, says Leslie Phang, head of investments at Schroders Private Clients. CNBC's Martin Soong finds out more.

Now some smart folks take the Vix one-step further and use it as a way to get out in front of market sentiment and score some gains on the swing. The guy in the video at right explains one way to do that using moving-average-convergence-divergence trends. Interesting stuff if you are technically minded. Keep in mind that nothing in the market is a sure-fire win, though.

You can go that route if you want ... a lot of people have looked at that video today. I'm not allowed to play such investment games ... company rules prohibit it. But that doesn't keep me from appreciating the Vix as a simple temperature gauge.

A little hot, no?

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VIX
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