VIX Stock Indicator to Predict Market Crashes
Developed by the Chicago Board Options Exchange in 1993, the CBOE Volatility Index (Chicago Options: ^VIX) is one of the Street’s most widely accepted methods to gauge stock market volatility.
Using short-term near-the-money call and put options, the index measures the implied volatility of S&P 500 index options over the next 30 day period but because it is basically a derivative of a derivative, it acts more like a market thermometer more than anything else.
A level below 20 is generally considered to be bearish, indicating that investors have become overly complacent. Meanwhile, with a reading of greater than 30, a high level of investor fear is implied, which is bullish from a contrarian point of view.
The smart thing to do then is to wait for peaks in the VIX above 30 and let the VIX start to decline, before placing your buy. As the volatility declines, stocks in general will rise and you can make big profits. You see it time and time again.
The VIX takes the amount of trading conducted throughout the day, monitors fluctuations and then makes a prediction of how much the market will swing during the next 30 days. The VIX has a very good track record and so far it has been very accurate in its predictions.
With financial news outlets such as CNBC, more and more people are becoming aware of the VIX so they quickly go out and sell their stocks and that, in turn, increases the VIX. As such the VIX almost ends up being a ‘self-fulfilling prophecy’.
In fact, the old saying with the VIX is, “When the VIX is high, it’s time to buy.” That’s because when volatility is high and rising, that means the crowd is scared. And when the crowd is scared, they sell, and stock prices fall dramatically, leaving bargains for money making traders.