The Volatility Index, or VIX, is a measure of the short-term expectations of investors regarding the market, according to StockTiming.com. It is considered an evaluation of the risks that investors believe are present in the current market. The more risks that investors perceive, the higher the volatility index.
Technically, the Volatility Index is created using the implied or perceived volatilities of a range of stocks from the Standard & Poor's 500 Index, explains Investopedia. The index is calculated from the number of "call" and "put" options present in a period. Call and put options are contracts that allow holders to buy and sell specified stocks, respectively, at a set price for a set period. The index first made its appearance in 1993, examining the options of only eight stocks from the S&P 500, and it expanded to include other stocks later.
The Volatility Index is sometimes called the "fear gauge," notes Investopedia. Risks can be seen as higher by investors during periods of uncertainty and as lower during times when investors are more confident about the movement of the market, reports StockTiming.com. Analysts use the Volatility Index to foretell the future movement of the market. It commonly moves in the opposite direction of the market.