The VIX is a gauge of S&P 500 options buying and selling. It measures the cost of insurance. When there is more buying than selling in the option market, the market is buying protection, and the VIX is higher and rising. When there is more selling than buying, the market is not seeking protection. The current level is historically low, implying investors may not be seeking protection. When the VIX is up, the cost of insurance is up. When the VIX is down, the cost of insurance is down. Options on the S&P 500 stocks are generally cheap when the VIX is low and expensive when the VIX is high. We would rather sell premium when the VIX is at higher levels, buy it at low levels. That’s how I think of it.
If you wait to buy insurance when a hurricane is on its way, you’ll pay a very high premium. We want to buy it when no one expects a hurricane.
Just as it’s important for a global tactical trader to understand how markets interact with each other, it’s important to understand how volatility interacts and what drives it.