In the world of investing, there are many adages that are commonly heard, such as “buy low, sell high” or “the trend is your friend.” However, there’s one lesser-known saying that holds significant weight: “When the VIX is high, it’s time to buy.”
The VIX, shorthand for the Volatility Index of the Chicago Board Options Exchange (CBOE), has been tracking real-time price changes of near-term S&P 500 options since 1993. It is considered a leading indicator of future volatility in the US stock market.
Investors often turn to the VIX as a benchmark index for measuring market volatility expectations over the next 30 days based on S&P 500 options prices. The VIX has an inverse relationship with the S&P 500, meaning that spikes in the VIX usually occur when stock prices drop, signaling higher market volatility and potentially a looming crash.
A normal range for the VIX typically falls between 12 and 20, with values below 20 indicating a stable investment environment and values above 30 signaling abnormally high volatility associated with a bear market. Historical spikes in the VIX, such as during the 2008 financial crisis and the COVID-19-induced market crash in 2020, serve as stark reminders of the index’s significance during times of uncertainty.
While direct investment in the VIX is not possible, there are several exchange-traded products (ETPs) available to investors that are based on the anticipated future value of the index. These ETPs, including futures contracts, options contracts, and exchange-traded funds (ETFs), can provide opportunities for investors to hedge against market crashes, but they also carry significant risks and may not be suitable for all investment strategies.
Ultimately, understanding the VIX and its implications can help investors make informed decisions during times of market volatility. As Warren Buffet famously said, “Be fearful when others are greedy, and greedy when others are fearful.” So, the next time the VIX reaches a peak, consider whether it’s time to buy.
Remember, investing involves risk, and it’s important to conduct thorough research and consider your own financial situation before making any investment decisions.