Recently, I noticed an interesting phenomenon—whenever the stock market crashes, investors often mention an indicator called the VIX Fear Index. To be honest, many people know the name but don’t quite understand what it actually measures.

Simply put, the VIX Fear Index is the market’s “fear thermometer.” It gauges investors’ expectations of the volatility of the S&P 500 over the next 30 days. The higher the index, the more nervous market participants are; the lower it is, the more tranquil the market. It was created by the Chicago Board Options Exchange in 1993, so it’s also called the CBOE Volatility Index.

How should we interpret VIX values? Generally, 0-15 indicates an optimistic and stable market, 15-20 is considered normal, 20-25 signals concern, 25-30 indicates increased volatility, and above 30 is basically market panic. Its calculation core is based on the implied volatility of S&P 500 options, derived through a weighted average. It sounds complex, but at its core, it simply reflects market sentiment.

A classic phenomenon is that VIX often peaks when the stock market hits bottom and drops to lows at market peaks. That’s why Warren Buffett’s famous saying “Be fearful when others are greedy” is especially applicable to the VIX Fear Index. Historically, every major crisis has seen VIX soar: the 1997 Asian financial crisis, the 2008 financial crisis (approaching 80), and during the COVID-19 pandemic in 2020, it also surged significantly.

But there’s an easily overlooked point—VIX is not a perfect predictive tool. It reflects expectations of volatility, not market direction. Sometimes, the market declines sharply but volatility doesn’t increase much, so VIX may not rise noticeably. Also, VIX has a mean-reversion characteristic; regardless of how high or low it gets, it tends to revert to an average level over time.

There are many tools for trading the VIX Fear Index. In 2004, the Chicago Board Options Exchange launched VIX futures; in 2006, VIX options were introduced, followed by various ETFs and ETNs. For retail investors, the simplest way is to buy products like VXX, VIXY, or UVXY, which track VIX futures. Their trading is similar to stocks. But be aware—these products involve futures rollovers and tend to depreciate in low-volatility environments.

How to invest using the VIX Fear Index? There are several approaches. First, as a warning signal—when major events occur, VIX tends to fluctuate wildly, alerting you to market risks. Second, as a strategic guide—consider increasing positions when VIX is low, and reducing or holding hedging assets when VIX is high. Third, as a hedging tool—in anticipation of rising volatility, VIX-related derivatives can protect your portfolio.

However, it’s important to emphasize that a high VIX value does not necessarily mean a bear market. Studies show that when VIX spikes rapidly and the stock market declines, it often signals that a bottom is near; when VIX rises from lows while the market is rising, it may indicate a reversal. But note that VIX provides buy signals simultaneously, while sell signals tend to lag—this is crucial to remember.

Taiwan also has the Taiwan VIX, based on TAIEX options, which similarly reflects market sentiment. During the COVID-19 pandemic in 2020, the Taiwan VIX spiked to 57, and in 2021, as the pandemic worsened, it approached 40. This shows that Taiwan’s stock market, as an open economy, is heavily influenced by international factors.

All in all, the VIX Fear Index is essentially a quantification of investor sentiment. It can’t tell you whether the stock market will go up or down; it only indicates how tense the market currently is. In practical trading, it should be used as one of several reference signals, combined with other analyses for comprehensive risk management. After all, true investment wisdom isn’t about predicting the market but understanding market sentiment and making rational decisions.