Wednesday, August 12, 2009

The Fear Index

Despite the gains the markets have put up in recent weeks, are investors still nervous? The Chicago Board Options Exchange compiles a Volatility Index - also known as the market's fear index - and it rose 4.1 percent to 26.01, its highest level in a month. Historically, the average is more like 18-20. After peaking at a record 89.5 last October, in the midst of the banking meltdown, it's down 35 percent in 2009 but now it appears to be moving back up.

But volatility doesn't necessarily equate to a bear market; volatility can mean violent upward price movements, too. The Volatility Index looks at options based on the entire S&P 500 to see how much volatility investors are expecting over the next 30 days. Call options, those expecting an increase in stock prices, raise the Volatility Index just as much as put options, which expect downward price movements.

So the fear index isn't always aptly named. Investors suspect there are extreme times to come in the market, but it may well be extremely good.

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