Options Wonderland

[Market Technician]

I've heard this saying, "When volatility is high, it's time to buy, but when it's low, it's time to go." I think it was in the context that volatility is increasing when stocks are falling and that's a good time to buy. Conversely, when volatility is low, it may be time to take profits and avoid a correction. Do I have this right?

The sayings "VIX is high, it's time to buy" or "VIX is low, it's time to go" are often used with reference to the CBOE Volatility Index ($Vix). The index tracks the expected volatility of the Standard & Poor's 500 Index ($SPX), which is updated in real time using the prices of SPX options. In addition, VIX is often used as a contrary sentiment indicator.

When VIX is high, investors are driving up the prices of SPX options, which is a sign that they expect increasing levels of market volatility going forward. Therefore, VIX will rise to high levels during market panics or crashes. Historically, these times are also the best times to buy stocks because investors overreact and drive down stock prices too far. So when VIX is high, it's time to buy.

On the other hand, when VIX is low, investors may be showing too much complacency or bullishness. Most market tops occur when sentiment has become too one-sided and too much optimism is priced into the stock market. So when VIX is low, it's time to go, or move out of the market.

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