Uncertainty is the only certainty there is, so much so, that many are willing to place a bet on it. The COVID-19 pandemic has led to an ever-escalating human health crisis, rapidly declining economy, and unforeseen market volatility. Volatility is the swings in stock prices. As a result, traders have adjusted market tactics to not only minimize losses but to also profit from the said volatility.

The CBOE Volatility Index (VIX) is a market index created by the Chicago Board Options Exchange that tracks the 30-day forward-looking volatility of the S&P 500 (SPY  ) options. The VIX is also referred to as the "fear index" or the "fear gage" because it is used by investors as a way to measure market risk. The larger the price swings of a financial instrument, the higher the level of volatility. There are two ways in which volatility can be measured. The first is historical volatility (HV) which uses historical data on option trading to forecast market swings. The second method is called implied volatility which is forward-looking, and volatility is implied by the option prices. It does not say in which direction the instrument will move (just how much).

A short introduction to options: options grant the right to buy or sell an asset at a pre-determined price and date. When investors are confident stocks will rise they want to lock in a lower price so will purchase call options which grant the right to buy an asset. When investors expect stocks to fall they want to lock in a higher selling price before the drop so they purchase put options which grant the right to sell.

The VIX is quoted as a price but it is actually a percentage. Volatility is always a percentage, even though it might not be spoken about as such. For example, a VIX priced at 15 means 15% annualized volatility (in other words, SPY will move at an annualized volatility of 30% for the next 30 days). The VIX negatively correlates with the SPY because when the market sells off, volatility tends to increase. Thus, when the SPY is up, VIX is generally down (and vice versa). This is because of something called the volatility skew which causes the VIX to go up when the market falls (bear) and fall when the market improves (bull). Briefly put, volatility skew is an options trading concept where options on the same underlying asset and same expiration but with different strike prices have different implied volatility in the market because investors are willing to pay more to protect against losses. The more volatile / erratic that the market is, the higher the VIX. Demand of calls and puts rises and options contract prices increase which drives the VIX up. Volatility trading last saw a boom during the 2008 financial crisis.

And now, traders are not only using the VIX to select investing strategies, but they are also placing bets on it and are using this opportunity to profit off the current market turbulence. However, this has drawn criticism because this betting on market volatility could actually be making markets more volatile. Volatility trading has become such a prominent strategy that placing bets on market movement can itself move the market and create volatility during calm periods. While this has created profits for some, it has also left others with losses.

Senior managing director at volatility hedge fund Aegea Capital Managements LLC, Cem Karsan, commented that "The exposure in these derivatives is so significant now that it's often the tail wagging the dog. It's definitely a structural change in how markets work." What started out as a metric is now used as a tool to bet/gamble on market movement.