CBOE Volatility Index (fear index)

Market volatility indicator reflects relative calm.

VIX is the ticker symbol for the Chicago Board Options Exchange Volatility Index, a popular measure of the implied volatility of S&P 500 index options. A high value corresponds to a more volatile market and therefore more costly options, which can be used to defray risk from volatility. If investors see high risks of a change in prices, they require a greater premium to insure against such a change by selling options. Often referred to as the fear index, it represents one measure of the market's expectation of volatility over the next.

The price of call options and put options can be used to calculate implied volatility, because volatility is one of the factors used to calculate the value of these options. Higher (or lower) volatility of the underlying security makes an option more (or less) valuable, since there is a greater (or smaller) probability that the option will expire in the money (i.e. with a market value above zero). So a higher option price implies greater volatility, other things being equal.

Investors believe that a high value of VIX translates into a greater degree of market uncertainty, while a low value of VIX is consistent with greater stability.

Traditionally the VIX has traded between 10 and 30. The VIX hit a record 89.5 in October at the height of the financial market meltdown.The index spent most of the first quarter in the mid- to upper-40s. In April it fell below 40 and it's currently in the low-30s. The recent downward movement indicates a sense of relative calm from big swings in the stock market.

But with the historical average around 18, the current level is nearly twice the norm. That means that while investors feel better than they did last fall and even earlier this year, they believe some market uncertainty still lingers. Their strengthened comfort level can be attributed, at least in part, to progress being made to stabilize the nation's banks. Investors have a better understanding of the government's bailout plan and they've seen some glimmer of hope that the recession may end later this year.