By: James Overmoyer
Have you heard of VIX? If you have, then you know that many investors are betting against, or shorting, it right now. VIX, in simple terms, is a measure of the stock market’s volatility and risk. The measure is used to show the fluctuation in prices throughout the entire market and the risk involved in investing in the market, by measuring how much these prices can change.
For example, imagine you’re buying a toothbrush and planning to sell it back later. VIX will tell you how much the price of your toothbrush might rise or fall.
VIX is measured by the amount that investors are willing to pay for an option - an agreement for the investor to buy or sell a stock at a specific price in a certain period of time. If investors are buying more, then the premiums go up; the opposite is true if there are more investors selling options. When the premiums go up, VIX will rise with it. VIX is also used to measure the annualized standard deviation for the S&P 500. What that means is, when VIX is at 20 percentage points, for example, then the S&P 500 will stay within +/- 20% over one year.
VIX is known as the “fear index.” VIX is often seen as an indicator of the future; when VIX is high the market typically drops down rapidly. Some people like to trade VIX, like other securities. Last year, the shorting of VIX gave investors a 190% return. However, shorting VIX is dangerous because VIX is unpredictable.
VIX is essential in understanding investor mentality. Every day, investors consider many metrics like historical and implied volatility. Historical volatility is statistical volatility determined by closing prices over a timeframe of 10-180 days. Historical volatility can determine if there are higher than normal levels of volatility. Implied volatility gauges the imbalances of supply and demand to determine future volatility. Implied volatility can be affected by a single company or market-wide events. For example, there could be news of an expected higher earnings two days before the earnings are reported. In turn, both option premiums (or the price of a stock) and implied volatility would rise. However, after the earnings are reported, the implied volatility is likely to decline in the absence of an event to drive demand and volatility.
So what does this mean for you? Knowing how the market is moving is essential to understanding the correct time to buy and how to make money off the market. Even if you’re not actively buying or selling stocks, recognizing the impact the stock market has on your money, regardless of where it is housed or how you are earning it, is important, and VIX plays a significant role in that impact. For more knowledge and expertise, ask me a question by emailing firstname.lastname@example.org.
By: James Overmoyer
Are you planning to go to college? Do you want to buy a home? Do you ever want to invest your money? If your answer to any of these is yes, then you should be paying attention to the stock market. Your parents probably have a retirement account or a money market account. Growth for all accounts, retirement or otherwise, depends on the market rates. Market rates, or interest rates, are what grows your money, no matter where you’ve invested it. Interest rates are the return you get for allowing a bank to use your money. In that way, the bank lends you the money to, for example, go to college, and then you repay that money plus interest, allowing the bank to make a profit.
Interest rates are in the hands of Jerome Powell, the new Chair of the Federal Reserve. The Fed Chair, along with 12 Federal Reserve bank presidents, sets short-term interest rates and is the highest authority on driving the economy’s interest rates, which help to protect the economy from inflation that devalues our money. Inflation is basically when currency - in the U.S., the dollar - devalues because of the amount of dollars in circulation. Inflation will cause everyday prices to rise: you might have to pay two dollars for what was a one dollar meal. Increasing interest rates can help slow inflation by encouraging people to borrow less money and save more. High interest rates lead to less money going into the economy and in circulation. Low interest rates cause the opposite: more money in consumers’ hands, flushing the economy and causing inflation. The growing economy is starting to lean toward higher growth, which is why rate hikes on interest are staring us down. These increases are to help put the brakes on the economy and steady it before a possible recession. While the market is still a bull market, or a market in which buyers are investing because they anticipate growth, the volatility is unsettling.
Do you want to observe why stocks move and why you’re paying more for a can of soup? If so, check back for my monthly financial column, where I will answer these questions and more. If you have any other burning financial questions, e-mail me at email@example.com.