How to Profit on Stock Market Volatility

NEW YORK (TheStreet) -- Imagine if we knew the level of confidence investors had in the markets on any given day. I can't teach you how to read minds. What I can suggest is looking at the S&P 500's "Fear Gauge," which may be the next best thing.

Volatility is currently running high in the stock market. Conventional thinking suggests that more volatility brings greater risk, which in turn allows for greater potential reward or loss. I've written in the past about my passion for trading stocks with high volatility and have explained how I successfully traded highly volatile individual stocks. Today's question goes beyond trading individual stocks to understand how to trade stock market volatility.

First, how do we measure stock market volatility? Enter the VIX. The VIX, also known as the Fear Gauge of the stock market, traces the volatility of the S&P 500.

Below is the formula for measuring the VIX. The VIX is reported daily, but is calculated repeatedly on the day. The VIX =



(Here are more details on calculating the VIX.)

Put in simplest terms, this formula shows expected volatility by averaging out-of-the-money Put and Call Options every day to  measure the expected annualized movement of the 30-day expected volatility of the S&P 500 index.

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