Last week finally provided some volatility in the market place. The S&P 500 Index (SPX) was down 2% on Tuesday, and then fell some more on Wednesday. Over those two days, the index fell a total of 2.6% -- which is its biggest short-term loss since last August. The CBOE Market Volatility Index (VIX), which tends to move in the opposite direction as the market, spiked higher as a result, moving up 35% over the two-day period.
When the market begins falling, traders rush to hedge their investments to guard against a significant drop in the market. A popular way to hedge is to buy put options on the SPX. The scramble to purchase these options increases option premiums -- and, in turn, the VIX. That's why the VIX is called the "fear index."
To continue reading this article click on the link below: