Word: vix
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What is next for the VIX? That all depends on investors' fear of a further decline in stock prices. Remember: even if the VIX continues to fall, that does not mean that high volatility for stocks is finished. Investors should still hope for volatility, realized from a recovering rally. But a low VIX - signaling reduced uncertainty - would likely signal a coming rally, rather than stagnation in prices...
...still a long way from the halcyon days of yore - remember, the VIX long term average is half of today's level - but investors at least seem to once again believe that day will follow night. And that's good news...
...VIX is not perfect, nor is the sense of volatility it attempts to predict. Volatility can mean many different things in practice: a stock whose price undergoes large price fluctuations and one that chops quickly in a small range might have the same measured volatility, but they are clearly not equally risky. Even though the concept of volatility is abused and taken for granted in the financial world, it is still the best-known measure of risk and, therefore, useful for investors. (See the best business deals...
...fact, the VIX does not even measure volatility. The VIX is a measure of demand for options, more than it is a measure of volatility. More accurately, it takes account of the worst-case volatility that investors writing, or selling, options are expecting. In a relatively stable market, the VIX probably does mimic realized volatility fairly accurately, but in desperate times, as investors flock into put options - and greater volatility is possible in the near future - the VIX is an inflated measure of actual volatility...
Because the VIX is supposed to predict near-term volatility, the VIX calculation only considers options expiring in the next two months. The VIX is measuring "very near-term fear." While many investors look to the VIX as an indicator of a bottom to the market, it does not possess much long-term significance...