things in Ukraine are going to get any

better.

If you turn on CNBC, you'll probably

hear something like this:

indicator that the market doesn't know

which direction to move on this and I

wouldn't be selling at a time when the

VIX is at 30.

With sentiment index, the VIX, just

remember, in the peak of the pandemic,

we hit, you know, over 80 on the VIX,

The volatility index, also known as the

VIX, or even Wall Street's fear gauge.

It's always been called the Fear Index.

It basically takes a read of the

market's blood pressure.

The VIX goes higher when investors are

scared, anxious, nervous and uncertain.

What is the risk? What's the fear?

What's the level of uncertainty or even

the level of stress that's in the

marketplace at a given time?

It's just a unique tool that we can

actually quantify that.

So, even though volatility seems

intangible, there's actually a way that

markets measure such turbulence and

sentiment. I mean, take a look at this

equation.

What does it mean for the market when

Russia invades Ukraine, right?

So you can see that in the VIX, and you

can see that in real time in the VIX.

And investors rely on it

When you understand how investors are

feeling about what's going on in the

world, you can then understand how the

market may move.

Here's how market volatility is measured

and how investors use that information

to make money.

Stock price changes are simply the

product of people buying and selling

stocks.

So volatility is just price movements

that are above normal variance.

The reason that the VIX index was

created was it was a way to measure

what institutional investors or the big

investors were doing to hedge their

bets, and if they were hedging that the

market was going to go down.

That was a sign that there was fear in

the marketplace

When the VIX was originally introduced

in 1993 by the Chicago Board Options

Exchange, it had a different

methodology based on calculations

around the S&P 100, and that old

measure still goes by the ticker symbol

VXO. But since 2003, the CBOE updated

the VIX to be based on the S&P 500.

Because the S&P 500 is this measure of

the broad market, the VIX is a measure

of the volatility of the broad U.S.

stock market.

Usually, there is an inverse

relationship between the activity

that's happening in the major index,

which is the S&P 500 and what's going

on the base. It's generally inverse.

The VIX is a forward looking index

measuring implied volatility.

As the CBOE puts it, the VIX index is

intended to provide an instantaneous

measure of how much the market expects

the S&P 500 index will fluctuate.

Within 30 days it measures to what

degree investors are uncertain about

the stock market.

The movements are really triggered by

major events.

If it's negative news, then sometimes

people get get a little bit scared.

That's why when we talk about the VIX,

we call it the Fear Index, or people

tend to really kind of want to move and

transition their assets out of more

riskier assets and into more safe

assets.

If you look at the VIX over the past few

years, you can see it spike when the

pandemic hit in March 2020, which was a

record, and then again in October 2020,

when infections spiked and stimulus

negotiations stalled, or in November

2021 when Omicron swept the nation.

Then even more recently, when Russia

invaded Ukraine in February 2022

Overall uncertainty also spikes the VIX.

So when we see the VIX spiking and

getting higher in January and leading

in really the beginning of February,

that was primarily around this

uncertainty of the Fed and when they

were going to raise rates by how much

the pace, all of that kind of stuff.

There's a complex mathematical equation

at the core.

Basically, the VIX measures volatility

by tracking trading in S&P five hundred

options.

It's measuring implied volatility over

the next 30 days, and that's derived

from option activity.

So puts and call options are deriving

whether the VIX is above norm or below.

That's the catalyst for what sparks and

moves it in either direction.

Now, the options market makes this a

little tricky.

Options are just a hedge.

You don't own the stock outright, but

you're owning the option that's

tethered to the stock.

Let's say something happens in the

world. An event happens like the Fed's

uncertainty or Russia invading the

Ukraine, and investors believe that the

overall economy is not going to be more

positive in 30 days.

The options contracts that they are

buying, it's really betting on the

market going down.

Obviously, it can get far more

complicated from here, but just on a

very basic fundamental level, it's a

hedging opportunity.

What options contracts allow us to do is

bet on whether a price is going to go

up or price is going to go down.

This is what the VIX index follows to

gauge market volatility: those trades.

Imagine a rollercoaster when stocks

sell off.

Investors may get scared so they could

buy options to protect their

investments. All those protective

purchases, a.k.a.

options, send the VIX higher.

It's really measuring the degree of

price movements, so I think the larger

the price movements, the higher the

volatility. And just to kind of put

some things in perspective.

VIX readings over 30 are considered

relatively large volatility.

VIX below 20 is an indication that the

market is rather complacent, so there's

not a whole lot of concern for any

near-term volatility and or events that

would spark a draw down

When the VIX is popping, so it's

soaring, it's above 19, which is its

median, it's average.

It is mean reverting.

So when it moves up very quickly, it

comes back down to its center that 19

or its moving average, oftentimes you

can look at the 20 day or the 50 day

moving average.

When it gets very far away from those

technical levels, you can expect it to

fall back down into that territory

relatively quickly.

Oftentimes, investors are always looking

at the VIX today as, hey, 30 days from

now, you know, we're going to be

extremely volatile and that might not

be the case. They're taking input data

from today, buying activity premium

options for today.

That's implying the future for

tomorrow. But tomorrow could be a very

different day, and I think that's very

important to make sure you take note of

as a retail investor.

Investors can use the VIX to help them

make investment decisions, or they can

indirectly invest in it.

A couple of things that you can use the

VIX for. Number one, it really is this

kind of overall measure of the level of

market risk. Stress in the market.

And I think that that's really

important to understand before you're

making an investment decision.

When we see volatility spiking, it is a

signal for us to take a look at some of

the names or our high conviction name

list, you know, and see what's going on

with these names. But it's going to be

spiking for a number of reasons.

It could be, you know, some other

headline risk or headline news that's

impacting price movement.

And sometimes these are short term

issues. Sometimes they're more long

term issues where it might not be an

opportune time to buy at this level,

but it's a great indicator just to have

an understanding of volatility where

you're going and potentially what the

price moves might look like over the

next 30 days.

Investors can also invest in volatility.

They can invest in the VIX, so not

directly, but they can do it through

ETFs. Exchange traded funds were also

notes when they do that, see, there's

like a negative correlation between

volatility and stock prices.

So when you look at an overall

portfolio, sometimes you need certain

things to zig while other things are

zagging. So that's the whole kind of

point of asset allocation, right?

So like stocks and bonds and and

alternative asset classes, you have

these different elements in a portfolio

so that they do different things and

they also support one another.

When one is up, one might be down.

When one is up, one might be just a

little bit up. It's a good hedge for

the S&P 500.

Now the VIX can be used for short term

tactical trade ideas for sure.

Or if you are, you know, your window of

investing is much shorter, it might be

something you use as a key determinant

of when you kind of switch different

asset classes or different parts of the

market that you want to be invested in.

You know, the most important thing is

having a plan, whatever you are

investing for, whether you are a trader

or an investor, having a sound plan,

And if you're a long term investor, so

you're investing for retirement, you're

investing for something 20, 30 years

down the road. Today's VIX price

shouldn't concern you too much.

Invest in you ready set grow.

CNBC and Acorns.