The VIX index—otherwise known as the Fear Index—has had an interesting journey throughout 2020, largely thanks to uncertainty spurred on by the Covid-19 pandemic. What’s the Fear Index, you ask? If you’ve never heard of the VIX, let’s catch you up. The VIX index, also known as the stock market’s “fear gauge” is calculated by the Chicago Board Options Exchange (CBOE) and was created to track market sentiment as a result of volatility in the stock markets.1 It’s a tool used by traders and those who follow stock market volatility to pre-empt future volatility patterns, as well as get a feel for current market sentiment that may help to hone their speculations.2 James McDonald, CEO and chief investment officer at Hercules Investments broke it down into simpler terms: “The VIX reacts to drops in global stock markets as it measures the extent and speed of the fall. The greater the drop, the higher the jump in the VIX.”2
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Need help visualizing that? Basically, when the markets are experiencing volatility, the VIX tends to rise, prompting fears and a drop in confidence amongst traders. However, it’s important to keep in mind that the VIX represents market expectations, rather than what’s actually occurring. 2
The VIX index is one of the most popular resources for traders in the US to determine trader sentiment and market volatility, and various other products have since been created that are based on the VIX index. Now that you know what the VIX is, and how traders use it to inform their trading decisions, let’s take a look at what 2020 has meant for the VIX index.
The 2020 whirlwind
This year saw nothing short of an explosion of inclines and declines in the stock markets, and thus the VIX index followed suit with a whirlwind of a year. It all began in February when, reacting to unprecedented volatility cause by early Covid-19 fears, the index shot up from 16.457 on the 20th of the month to land at 68.545 on March 18th—a whopping increase of 316.5%. In fact, this was the fastest bear move that the index has ever experienced.3 From there, the VIX dropped gradually every month until it hit a major low for the year on June 7th, closing at 25.153. Over the subsequent months, the VIX bounced back up sharply, only to come gradually down again to form a pattern of summer volatility.
Essentially, the VIX index has been as choppy as most of the other stocks in the market this year, reflecting the extraordinary behaviour driven largely by the pandemic peaks and valleys throughout the world, the US elections, and geo-political tensions, all of which have all caused the market to react in unpredictable ways.
What is the VIX doing now?
In October, the VIX index hit its highest levels since mid-June.4 This probably wasn’t much of a surprise, considering the US elections were about to take place, second waves of Covid-19 were taking hold in many countries all over the world, and the recovery of the US labour market slowed considerably, which led to an increase in uncertainty about the country’s overall economic recovery.4 According to Chris Gaffney, president of world markets at TIAA Bank, “Choppy markets are here for a while, and I think we’re going to continue to see them until we see a vaccine that is widely distributed and we can move past Covid. Every time we see a resurgence, you’re going to see additional restrictions, which impacts how people spend money.”4 Gaffney’s sentiments hit the mark, as recently the VIX index closed on 24.955 on November 12th, a hefty 27.9% decrease since the index’s previous high of 34.645 on October 29th.
What’s next for the VIX?
As we get closer to a Covid-19 vaccine being approved, the index—unsurprisingly—drops even lower, and according to analysts, it could go below the 20 level, which would be a first for the VIX since the pandemic hit.3 And as we inch ever closer to the end of 2020, a time which includes the probable passing of a vaccine from pharma giant Pfizer, traders and market watchers alike are bound to keep an even closer eye on the VIX to see what happens next.
The bottom line
Even if a vaccine does get approved, it may take months—perhaps years—for it to go mainstream enough to make a major difference globally, which could lead to more periods of market volatility and—therefore—subsequent volatility for the VIX. This type of volatility may present both opportunities and risks for certain informed traders who trade CFDs, or Contracts for Difference. With CFDs, you can take advantage of price changes in both directions, choosing to go long or go short, depending on how you think the markets will move.
