I’ve been thinking about a question lately: why do some people actually make money when the stock market crashes? The answer lies in the VIX Fear Index.

Speaking of the VIX Fear Index, many people may have heard of it but don’t quite understand it. Simply put, it’s an indicator that measures market participants’ expectations of volatility over the next 30 trading days. It was created by the Chicago Board Options Exchange in 1993, so it’s also called the CBOE Volatility Index. The higher the VIX value, the more panic there is in the market; the lower the value, the calmer the market. That’s why Warren Buffett’s famous saying “Be fearful when others are greedy, and greedy when others are fearful” is especially relevant here.

I’ve noticed an interesting phenomenon. Whenever a market crisis occurs, the VIX Fear Index spikes. During the 1997 Asian financial crisis, 2001’s 9/11 attacks, the 2008 financial crisis, and even the COVID-19 pandemic in 2020, the VIX reached extreme highs. The most dramatic was in 2008, when the VIX approached 80. These are all classic moments of market panic.

Looking at the numbers, a VIX between 0-15 usually indicates a calm and optimistic market; 15-20 is normal; 20-25 begins to show concern; 25-30 indicates increased market volatility; above 30 is true panic. The calculation is based on the implied volatility of S&P 500 options, derived through a weighted average. It sounds complex, but the core logic is to reflect investor sentiment.

The VIX Fear Index has several notable characteristics. First, it is forward-looking, reflecting expectations of future volatility rather than historical data. Second, it has an inverse indicator feature—often peaking at market lows—hence some use it to find buying opportunities. Another key trait is mean reversion: regardless of how high or low it gets, the VIX ultimately tends to return to its average level.

In terms of application, the VIX Fear Index is especially sensitive to warning of specific events. Economic data releases, political events, financial crises—all can trigger sharp volatility. I’ve found many investors use it to guide their strategies: consider buying when VIX is low, shift to a conservative stance when VIX is high. This makes sense to some extent, but it’s important to note that a high VIX doesn’t necessarily mean a bear market; sometimes it just reflects the market digesting uncertainty.

Taiwan also has its own Taiwan VIX, compiled by the Taiwan Futures Exchange, reflecting volatility expectations for the Taiwan stock market. Because Taiwan’s economy is highly integrated with the global economy, the Taiwan VIX often correlates closely with external factors. During the COVID-19 pandemic in 2020, the Taiwan VIX spiked to 57; in 2021, as the pandemic worsened, it approached 40—classic panic moments.

If you want to trade the VIX Fear Index, there are now many tools available. VIX futures were launched in 2004, VIX options in 2006, and later various ETFs and ETNs. Products like VXX, VIXY, UVXY are quite liquid and convenient for risk hedging. But be cautious: these products involve futures rollovers, which can lead to value decay in low-volatility environments.

Finally, I want to emphasize that while the VIX Fear Index is useful, it has limitations. It only reflects volatility expectations and cannot accurately predict the direction of market moves. Also, for indices like the Dow Jones or NASDAQ, the VIX isn’t a perfect contrarian indicator. Investors should treat it as a sentiment gauge—an emotional weather vane—and combine it with other analysis tools for decision-making.

Currently, market sentiment is relatively stable, with the VIX fluctuating between 12 and 20. But factors like delayed Federal Reserve rate cuts, geopolitical risks, and election uncertainties are still present, so staying alert is necessary. The key is to understand the essence of the VIX Fear Index: it’s not a prediction tool but a quantification of market psychology.