207 If you are worried about the price of your shares going down, you can buy the right to sell them at a higher price, even if the shares fall. That protects your investment. It's like buying insurance on your $20,000 car - you pay a premium in case you get into a wreck. As long as you survive, all you've lost is the premium and deductible. The more likely you are to crash your car - or the more likely it appears that share prices will fall - the more you'll pay for your car insurance premium, or your "put" stock option. But the VIX takes a wider view of the market, based on the S&P 500. The more crazy up-anddown swings there are, the more people hedge their bets out of legitimate fear and the more they are willing to spend for these options. As the market careened in October, there was a lot of option buying going on, with an average of 16.6 million contracts traded per day. By contrast, five years ago, the October average was 4.2 million. This year, for the first time, three billion contracts were sold in a single year. That happened Oct. 20. "People are a lot more willing to pay for insurance in the marketplace with the underlying asset moving abruptly," Jablonski said. Traders, who will bet on anything, actually make trades on the VIX itself. Rader says the VIX acts as another forecasting tool. To him, the high VIX, now mitigating, signals a bottom. "When there is blood on the streets, it's time to buy," he said. "So now we're up to our throats in blood."
Villanova School of Business 2008 Media Report