Transcript:
Easan Arulanantham:
What is the VIX? You know, I keep hearing about it in the news, you know, people are always talking about the VIX, whenever there’s kind of like this turmoil in the market. What is it?
Tom Vaughan:
All right. So the VIX is a fear gauge. Okay? Let me show share screen with you here too. We had this, this shot before one of our other shows. So it’s actually a fairly complicated measure, I’m going to, I’m going to really hit the high notes. What it does is it measures the the number of puts versus calls that are being sold on a short term basis against S&P 500 kind of futures contracts. And it’s done by the Chicago Board of Options Exchange. But in essence, what it does is it shows fear, when more people are buying calls, sorry, buying puts, that means they’re, they’re basically trying to protect their portfolios, right? When people are buying calls, they think things are gonna go up, and they’re gonna make money on that, right. So again, don’t get too complicated. But what happens is, when you see the number go higher, that means that the fear is getting higher, there’s, they’re, they’re buying more puts. And I put some little boxes there on some of the high points this year. Historic historically 33 and above, right, when that when it gets to 33. And again, it’s just a number. That’s been a good time to buy stocks. So this is sort of a contrarian indicator that says, Fear is high. When fear is high, I buy, right. That’s the contrarian mantra as far as that goes. And so it is a way to kind of see what fear is happening in the market altogether. I think it’s pretty interesting. You know, I look at the VIX, every day all day, really, just to see what’s going on, just to see how this might play out. But that’s, that’s what it looks like. It’s been, you know, all over the place, but it’s hit some high points this year, you know, melee and what are we 12345? They’re kind of in that 30 to 36 range. You know, that’s not that normal, because this has been a down market with lots of consternation, because of inflation and what the Fed is doing about it, right. So that that’s what the VIX is, it’s definitely something to know about. And, you know, just at least to have a cursory understanding of what it is. There’s lots of different measures for for fear, but this is one of them.
Easan Arulanantham:
Should a normal investor be following this or an average person that’s just looking at the market. Should I be worried when the VIX is high?
Tom Vaughan:
Personally, it depends on how the market plays out. But we’ve been using these as points to rebalance. Right. And so when the fear gets high, generally, the price is kind of stretched down. And we have another measure that we use for that, while there’s RSI. And when those two has happened together, we use this to rebalance. And so we’re basically picking points to kind of buy the dip as far as that goes. But it kind of depends, you just got to be careful. I mean, you know, we ended up with a 50% downturn, or something along those lines, you know, buying the dip all the way down. Again, if you’re young, why not? That works, you know, depends on how long you have, how much tolerance you have for risk. You can do quite well with this. But yeah, I think it’s a, it’s at least a short term gauge to show some bottoms, right? And that that’s what I would look at it for. If I had some money, I was thinking about investing. And all of a sudden the VIX jumped to 33 or higher, I might say, okay, you know, especially if I have a long term outlook, okay, now’s a good time to buy. Right? Because it’s generally works. When everybody’s running one way, the best investor is running when everybody’s running out. Right. And that’s what this is. Basically, the market is running away when that number gets high, and you’re walking in and buying at that point in time. And so, you know, certainly takes some courage as far as that goes, but it’s it works. It has worked anyway.