| VIX
The VIX is derived from the prices of ALL near-term at-the-money call and out-of-the-money call and put options traded on the S&P 500. Options that are in the money are not included. The VIX is a measure of fear and optimism among option writers and buyers. When a large number of traders become fearful (when they want to buy a large number of put options, say, to hedge their long positions in stocks) then the VIX rises. Conversely, when complacency reigns, the VIX falls. The VIX is sometimes used as a contrarian indicator (especially at extremes) and therefore can be used as a measurement of how oversold or overbought the market is. During the bear market of 2000 to late 2002, a VIX reading of 20 is usually an indication of an overbought market, while a reading of over 40 is usually an indication of an oversold market. In recent months, however, the VIX has been consistently under 20 (similar to market conditions during the period 1991 to 1996) – so raw VIX readings are sometimes of limited value, unless you combine the VIX readings with some kind of overlay or other technical analysis studies.
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