What is the “Fear Index” and why should I care?

The VIX Index is a measure of market expectations for near-term stock price volatility derived from current market quotes on S&P 500 index options.  The VIX is also known as the “Fear Index”.  Watching the VIX allows professional portfolio managers to monitor the cost of principal-protecting a stock portfolio.

VIX Index – Click to enlarge.

As you can see in the chart above, the VIX index (“fear!”) has receded to a post-recession low.  This means portfolio insurance is currently relatively cheap.  A recent article in Barron’s describes some practical ideas on how to capitalize on this fact:

If you are worried about the near future, buy puts to protect your stocks.  (or) …think of selling some stock and replacing your shares with calls.  You can use stock-replacement strategies to withdraw your initial investment and limit your risk. –Steven M. Sears

Successful Portfolios is adept at helping clients execute principal-protected investment strategies that avoid the high-costs and illiquidity of annuities and structured products.

About the Author:

Parker Evans, CFA, CFP, CMT is President of Successful Portfolios LLC, an SEC Registered Investment Advisor Firm based in Clearwater, FL. Parker helps individuals, families, and organizations plan and manage custom investment portfolios at leading brokerages including Charles Schwab, TD Ameritrade, and Interactive Brokers.