The Vix volatility index is going berserk

Jessica Morris
Follow Jessica
Investors could be in for a bumpy ride (Source: Getty)

This widely watched "fear index" went berserk today, indicating market mavens are feeling increasingly uneasy.

The Chicago Board Options Exchange Volatility Index (Vix) rose 11 per cent in early morning trade stateside.

This is significant because the Vix, conceived in the early 1990s, gauges expected volatility of future prices and is tied to the S&P 500.

The logic is that, as investors start to see signs of increased risk, they'll hedge against this by buying options. The higher the expected swings in price, the higher the premiums charged by writers of options.

It's led to a belief we should be scared when the Vix ticks up, and relieved when it eventually careers down.

But others rubbish this as a market myth.

"The truth is that the Vix is not an “Index of Fear” and never has been," Steve Sedgwick, CNBC anchor, has previously wrote in City AM.

"It’s a plain old measure of premium: premium in option products that are a derivative of the equity market, a market that apparently is at, or near, all-time highs in many cases."

(Source: CBOE)

Related articles