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The VIX has Evolved
The fear gauge is now a professional fear gauge
Introduction
The VIX, or volatility index, is commonly known as the fear gauge in the financial markets. For many years, traders have view it as a reliable index to gauge the amount of panic in the market. For many years, VIX delivered.
Until 2022.
Misconceptions
Before I delve into what happened, allowed me to quickly clear up some misconceptions.
Misconception 1: It tells you the volatility in the market today.
Misconception 2: It is inverse of SPX: if S&P 500 goes up, VIX goes down, and vice versa.
What is VIX?
If you refer to the VIX white paper, or just the information from the website faq, you will see a very important section on the selection on options that are used to calculate the VIX index:
Also, you will see the formula below:
