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If asked, most investors would say they prefer stable investments as opposed to volatile investments. The word “volatile” just isn’t pleasant; after all, any situation that becomes volatile is likely changing for the worse, not the better. None of us aspires to have volatile relationships.

But for investors, volatility isn’t always a bad thing. When the stock market is volatile, it is fluctuating with prices moving up and down. I’ve never known investors to complain about prices moving too high. But when volatility takes the form of downward-moving prices, they are unhappy.

The key metric for gauging stock market volatility in the next 30 days is the “VIX.” VIX is the ticker symbol for the Chicago Board of Exchange (CBOE) Volatility Index. This index is constructed using short-term near-the-money call and put options to measure the implied volatilities of a wide range of S&P 500 index options. This may sound fairly complicated, and that’s because it is. The VIX measures the amount of volatility in option premiums (prices). Wealth advisers and investors find the VIX important because it provides a reasonable projection of the expected trading range of the S&P 500 index over the next month.

The VIX is a highly touted index in the financial media, sometimes called the “fear index.” We know investors are primarily motivated by fear and greed. Investors become bullish or greedy when they think the stock market is going higher, and they become bearish when they fear the market will fall. Reading the tea leaves of market sentiment is very difficult, so investors routinely turn to the VIX. Because the VIX is basically a derivative of a derivative, it is best to think of it as a thermometer measuring investors’ sentiment.

A VIX reading below 20 indicates that investors are supposedly forecasting a healthy, low-risk environment. Readings below 20 are generally considered to be bearish as investors are complacent. On the other hand, when the VIX is 30 or higher, investors are generally considered bullish. There is an old saying that states, “When the VIX is high, it is time to buy. When the VIX is low, it is time to go.” Investors know that the market likes to revert to the mean, so extremely high or low readings of the VIX can be signs that the market is about to reverse.

Nashville is home to Vanderbilt professor Robert Whaley, who developed the VIX’s inner workings about 20 years ago. In fact, the head of research at the CBOE initially suggested using Whaley’s initials, REW, as the trading ticker symbol for the index. However, REW was already in use, so Whaley selected VIX. Although Whaley has received credit for creating the index, the CBOE maintains ownership of it.

Phoebe Venable, chartered financial analyst, is president & COO of CapWealth Advisors LLC. Her column appears each Saturday in The Tennessean.