The CBOE Market Volatility Index (VIX 23.50, -0.63, -2.61%) is a wildly popular index that many market observers have noted tends to
red demonstrate a negative correlation to the overall market.
When the market drops, the VIX tends to rise, and vice versa. In actuality, the VIX index price is derived from the S&P 500 cash index options. As such, this index actually measures an approximation of the volatility surface of a hypothetical 30-day SPX option.
Unfortunately for many retail investors, the CBOE also lists options and futures that essentially allow speculating on the VIX. I say unfortunately, because these options are severely misunderstood by the investing public and have often enticed traders into losing option positions. It's imperative to realize what the VIX is and, more importantly, what moves in the index really indicate. Also important is an understanding of VIX pricing and how VIX movements can be used as a market indicator.
Implied volatility (IV) is a critically important component of most options. A move higher in implied vol indicates the market is predicting uncertainty (or future movement in the underlying security). Declining implied volatility indicates the options market views the future as more restrained as far as the potential movement in the stock or index.
