 We constantly hear in the news the VIX disk, the VIX is low, the VIX has jumped, the VIX has fallen, what to do, VIX here, VIX there, VIX, VIX, VIX all over the place. Now in this video I'll explain what the VIX is, does it have any importance and significance for anything and how we can take advantage of the VIX and what are the risks of doing so. So if you're interested in the VIX, please stay tuned. So let's start with what the VIX is. The VIX index has been made in the 1980s by university professors and they measure the implied volatility of the SAP 500 by looking at the prices of 23 to 37 days put and call options on the SAP 500. If investors expect, so the VIX is a measure of what investors expect. Investors can expect whatever they want. However, if investors expect uncertainty, volatility, then the price of SAP 500 options will be much higher. If investors are complacent and don't think anything will happen significant, then the price of those options is very, very low. That is what the VIX shows, the investors' expectations. As soon as there is trouble, the VIX jumps. The best way to explain the VIX is to look at this. Currently the VIX is at multi-multi-year lows. The last time it has been so low it was in 2007 and I forgot to add this in my comparison to 2007 video, but again a similar situation. And you can see that when everything is good in the economy, when investors don't expect any kind of shocks, then the VIX is very low. August 2015 investors were very afraid about the hard landing in China. The VIX was much higher and it spikes immediately. 2011 US debt ceiling crisis. Again, huge spike. Huge spike in 2008 due to uncertainties related to the financial pre-financial crisis. So the issue with the VIX is that it spikes when something already happens. Thus it has no forecasting power. You cannot use the VIX to forecast, oh it will be like this or it will be like this. Something happens, something happens in North Korea tomorrow, something happens in Europe, somebody says something, there is an election or something, then the VIX immediately changes because options increase in prices and investors want more protection or they see more volatility. Therefore no forecasting power. And the no forecasting power is also a reason why journalists and the media like it. The only thing they can do is to explain what happened and the VIX is an excellent way to explain what has happened. Going back to the VIX, you can see how in August 2015 the SAP500 dropped and the VIX spiked. So it just follows what the SAP500 has been doing. This chart shows it even better when the SAP500 rises, the VIX falls and the other way round. Now we see the VIX at very low levels and you might think, okay how can I take advantage of that because something is for sure going to happen in the future. Let's see how you can take advantage of the VIX. Now the first thing to look at is the SAP500. When the VIX is low, investors feel good and they don't expect volatility. So if you want to protect yourself against any kind of downside in the next year, you can buy puts SAP500 puts at a 5% yearly cost. This means that by, let's say you are totally invested in the SAP500, if you invest 5% of that portfolio by buying puts, you are totally protected on the downside. So for a whole year 5% of your portfolio is relatively cheap. Usually this means if the VIX is higher cost much more. So that's one option to take advantage if you want to be totally protected on the downside. For those who are braver, you can always go short or long the VIX. And seeing how cheap the VIX is now, how low it is, going long the VIX doesn't seem that bad of an idea. However, there are risks. Let's see. Now there are some exchange-traded products, exchange-traded nodes that track the performance of the VIX, but they do it so on a daily basis. So their performance will constantly decline if a move in the VIX doesn't materialize soon. Let's here check the option chain for the iPad SAP500 VIX short-term futures for January 2018. If you buy calls, so you go long, you pay about 17-20% on the VIX and then if the VIX jumps, you can make a really, really nice return. However, again, 17%. The options are not that cheap on the VIX, but this is really for the break. Option trading, then it includes in an option trading portfolio where the risks and rewards are calculated and this can be a very interesting option. To see how risky that is, those who thought that the VIX will go down in the last eight months have lost almost 90% of their investment. So very risky way. This is really an investment where the risk can be total, but the rewards can be huge. If that's something for you, dig deeper into the VIX. So I wanted to just illustrate what the VIX is to give you a better understanding because you hear the word so much in the news and to see that it really has no forecasting power can be used for trading, but that's more betting or trading in a very, very carefully analyzed risk reward portfolio, which is something that the big boys can do. So for the average investor, if you hear the word VIX, you can simply forget it. You can just watch the SAP 500. If it starts jumping up and down, then the VIX will be much, much higher. Thank you for watching. Leave your comments below, looking forward to them. Click like if you like the content and I'll see you in the next video.