Why is VIX a fear gauge?

Article type: Short Communication

Authors: Carr, Peter

Affiliations: NYU Tandon School of Engineering, 12 MetroTech Brooklyn, NY 11201, USA. E-mail: [email protected]

Abstract: VIX is a widely followed volatility index constructed from the market prices of out-of-the-money (OTM) puts and calls written on the S&P500. VIX is often referred to as a fear gauge. While the market prices of OTM puts clearly reflect the fear that the S&P500 will drop, about half of the options used in constructing VIX are actually OTM calls. The market prices of these OTM calls clearly reflect greed rather than fear. In this note, we offer several explanations as to why VIX can properly be regarded as a fear gauge.

Keywords: VIX, volatility, fear gauge

DOI: 10.3233/RDA-170123

Journal: Risk and Decision Analysis, vol. 6, no. 2, pp. 179-185, 2017