The markets tacked on big losses yesterday as the crisis in Greece escalated. As uncertainty enters the markets, volatility ticks up as indicated by yesterday’s 34.45% increase in the VIX to 18.85. This was the 11th largest one day jump in the VIX since its inception in 1993.
The VIX is a measure of the implied volatility of S&P 500 index options and is often referred to as the fear index. It indicates the market’s expectation of stock market volatility over the next 30 days.
Implied volatility is exceptionally important to the options trader since it is one of the key components in the options pricing models. When there is extreme volatility in the market, it results in a sense of uncertainty as markets make sharp moves up and down. Traders will react emotionally to these whippy markets bidding up the premium of options in that market.