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Speaker 1: Welcome to Fear and Greed Q and A, where we

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Speaker 1: ask and answer questions about business, investing, economics, politics and more.

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Speaker 1: I'm Michael Thompson, and good morning Sean Aylmer.

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Speaker 2: Good morning Michael.

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Speaker 1: Sean. Today it is all about the Fear Index, which

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Speaker 1: is very appropriate for a podcast called Fear and Greed,

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Speaker 1: isn't it now. Earlier this week you told us that

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Speaker 1: Wall Street's fear gauge the VIX top twenty for the

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Speaker 1: first time since April. Out of context, that may not

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Speaker 1: mean a huge amount. So today I wanted to know

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Speaker 1: more about the VIX or the volatility index. What it is,

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Speaker 1: how it measures volatility, why it represents fear, what investors

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Speaker 1: can learn from it. A whole lot to cram into

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Speaker 1: the next four and a half minutes or so take

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Speaker 1: it away. Let's art at the beginning.

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Speaker 2: What is right? So the VIX index is officially known

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Speaker 2: as the CIBO Volatility Index, SIBO being Chicago Board Options Exchange.

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Speaker 2: So the CBO Volatility Index or the Fear Index, what

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Speaker 2: it does, Michael, in brief, it basically measures market expectations,

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Speaker 2: what investors think will happen in terms of volatility over

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Speaker 2: the next thirty days on Wall Street. So ah, if

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Speaker 2: it's a high index, people think Wall Street is going

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Speaker 2: to be volatile. Ye. If it's a low index, it's

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Speaker 2: the opposite. So how do you measure that?

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Speaker 1: Yes, so it's all about expectations.

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Speaker 2: Yes, it is all about expectations, but it's based on

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Speaker 2: options contracts. So not just expect I mean these are

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Speaker 2: expectations which people have put money into. So you know,

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Speaker 2: like an options contract is an agreement to buy or

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Speaker 2: sell a specific stock at some point in the future.

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Speaker 2: So if you think that you might have an option

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Speaker 2: to buy stock in the future if you think it's

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Speaker 2: going to rise, or sell stock in the future at

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Speaker 2: the current price, if you think it's going to fall.

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Speaker 2: So that's how options work. So what it's looking at,

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Speaker 2: So the VIX index is looking at these options contracts

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Speaker 2: and measuring what's going on there where there's a lot

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Speaker 2: of them, few of them, and judging based on that

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Speaker 2: what it thinks will markets expectations of volatility. So it's

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Speaker 2: measured sort of like starts at zero to fifty. I mean,

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Speaker 2: fifty is pure fear run for the hills. If you're

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Speaker 2: at fifty, like zero to twenty is sort of stable generally,

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Speaker 2: like twenty to thirty is mildly nervous once you get in,

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Speaker 2: you know, thirty to fifty year in panic mode, fifties fear.

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Speaker 2: You don't really see those sorts of numbers. I mean,

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Speaker 2: you mentioned it before, we were talking earlier in the

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Speaker 2: week that it pushed above the twenty point mark, which

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Speaker 2: is nervous mark. And that's after Donald Trump talked about

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Speaker 2: tariffs with China. It hit above pushed about forty points

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Speaker 2: briefly in April when there was all the talk about

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Speaker 2: a trade war. You know, so that's panic. Yeah, forty

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Speaker 2: points is definitely panic. What happens in vesters looks at

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Speaker 2: the VIX index and makes decisions, So they make a

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Speaker 2: decision about buying or selling the market based on the

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Speaker 2: VIX index. Interestingly, though it's beyond me how these things work,

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Speaker 2: you can actually buy VIX linked assets that you can

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Speaker 2: buy a future contract which is linked to the VIX index,

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Speaker 2: which still is underpinned by futures contracts.

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Speaker 1: Oh, that is that is getting very kind of inception

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Speaker 1: style kind of Sean. Did you know, do you know

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Speaker 1: what the highest level that the VIX has ever closed at? No,

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Speaker 1: I don't what is it? It was eighty two point

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Speaker 1: six y nine, and it was on March sixth to

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Speaker 1: Global Financial Christ twenty twenty, it was COVID.

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Speaker 2: Oh it's COVID, yeah.

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Speaker 1: Twenty twenty, March sixteen, twenty twenty. If we do go

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Speaker 1: back to the financial crisis, it was it did hit

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Speaker 1: an intra day high in twentusand and eight October twenty four,

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Speaker 1: two thousand and eight of eighty nine point five to three.

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Speaker 1: So I mean these are runs for the hills. They

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Speaker 1: are exceptional events and exceptional results on those days. That's

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Speaker 1: insanely high.

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Speaker 2: Yeah. Volatility, I mean we always talk about the market

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Speaker 2: doesn't like volatility, and you know, it likes legislation that's

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Speaker 2: set in place, likes knowing where policies are going. Investors

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Speaker 2: like knowing where companies are going. So in the last

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Speaker 2: couple of days, we've had A and Z come out

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Speaker 2: with this big strategy and investors like that, so they

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Speaker 2: buy it. We've had Treasury wine estates saying things are

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Speaker 2: struggling in China, so they sell it so that people like.

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Speaker 2: So when we talk about volatility, investors don't like volatility.

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Speaker 2: So there's a bunch of measures also out there. Beyond

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Speaker 2: the vix around volatility, and mostly not all of them

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Speaker 2: are this Chicago Board Options Exchange CBO. The reason we

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Speaker 2: should get used to that because we had a story

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Speaker 2: in the last couple of weeks where ask our regulator

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Speaker 2: has green lighted CEBO to start offering products here. So

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Speaker 2: we're going to hear a lot more about CBO. That's

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Speaker 2: a side. But some of their measures volatility measures. They've

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Speaker 2: got something called spot vole s PO t vol spotfole

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Speaker 2: day to day volatility in the s and P five hundred.

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Speaker 1: Michael, No, you know what, I'm just going to let

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Speaker 1: that one go, Sean, because it feels like we've been

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Speaker 1: going so well this whole episode, and I haven't said

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Speaker 1: anything that's made anyone question our credibility, and if I

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Speaker 1: start to make fun of that name, it's just going

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Speaker 1: to damage us. So please go.

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Speaker 2: Okay. The LTV the left tail volatility index? What is that?

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Speaker 2: So that's a measure of whether people think there's going

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Speaker 2: to be a black Swan event, so they're like rare

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Speaker 2: but catastrophic events for the market, COVID being a black

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Speaker 2: swan event being a good one. That left tail volatility index,

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Speaker 2: you reckon would be pretty high back in March twenty twenty.

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Speaker 1: Yeah, yeah, you would imagine, and so they are used,

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Speaker 1: but we hear more about the VIX.

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Speaker 2: Right, Yeah, and then there's just really more basic ones

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Speaker 2: like put to call options. So like put options the

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Speaker 2: bearish bets on the market, call options are bullish bets.

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Speaker 2: So the higher that ratio, the higher put to call

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Speaker 2: higher bearish to bullish basically shows that this more bearish sentiment.

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Speaker 1: I'll tell you what, today's episode has been crammed full

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Speaker 1: of knowledge, Sean. And if you did not learn something today,

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Speaker 1: then you just were not listening hard enough because there

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Speaker 1: are so many little gems throughout that The left L

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Speaker 1: Volatility Index is something that I will carry with me

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Speaker 1: for the rest of my days, Sean. Thank you very much.

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Speaker 2: Thank you, Michael.

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Speaker 1: And remember, if you've got something that you would like

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Speaker 1: to know, if you've got something that you'd like us

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Speaker 1: to dig into and for sure to explain in these

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Speaker 1: simple terms, then send it on through by LinkedIn, Instagram, Facebook,

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Speaker 1: or at Fearandgreed dot com dot au. Are Michael Thompson

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Speaker 1: and this is Fear and Greed Q and a