Dow Jones 8,745.45 +33.43 5:05 pm EST, Sun., Aug 11, 2002  NASDAQ 1,306.12 -10.40  For info, visit access.smallcapnetwork.com .  S & P 500   908.64  +3.18  To be removed, please click here .  Russell 2000   388.45  -1.39  VOLUME 02: ISSUE 55 SmallCap Digest Weekend Edition: Introduction To The VIX There is no certain way to gauge where the market is headed.  If there is then please forward us the secret formula.  However there are tools that traders and market technicians use to make an educated guess.  One of the most popular tools is the "VIX" which is a volatility index for the Chicago Board Options Exchange (CBOE). It is calculated by taking a weighted average of the implied volatility from eight calls and puts on the S&P 100 index. VIX measures the speed of price movement on the S&P 100 index and mainly tells traders the average premium levels of the OEX options traded. It can turn on a dime, going from low to high and back again similar to a stock. Although most of our readers do not need to utilize the VIX on a daily basis we felt it was important to understand how the VIX has been uncanny in its ability to predict market tops and market bottoms.  The next time you are wondering where the market maybe headed, pull up a quote on the VIX by clicking here. The usual rule of thumb is that when the VIX is high, it's time to buy, meaning traders will start buying index call options. When the VIX trades at lofty levels, it signals that options traders are betting on a continued drop in the markets by purchasing puts and selling calls in full force. This almost always precedes a bottom in the market, since the short-term trader is known for being wrong on the market's direction.  Conversely, when the VIX is low it's time to sell, meaning traders will start to buy puts because they feel that a market selloff is on the horizon.  Currently, the VIX is very close to 40. That means that options in general are very expensive. For buyers, that condition spells greater premium risk and less chance for reward. This is because the options on the OEX have a higher premium than normal, and if the VIX were to drop, premiums could drop with it.  For instance, if the VIX were to go from 40 to 30, option sellers would have a great chance of taking in premium faster as volatility declines. If the VIX were to rise from 40 to 50, option buyers would have the advantage because as volatility rises, so does the time premium in the options they hold.  VIX enables traders to gauge whether options are cheap or expensive. If VIX trades above 30, options are considered expensive and a selling strategy may prove better than simply buying options.  If VIX hits the low 20s, buying options will offer greater opportunities than selling options. Either way, using VIX to interpret the markets offers investors a tool for market timing and assessing option values.  Take a look at the chart of the S&P 100 Index above and compare that to the chart of the VIX.  Buying whenever the VIX hits 40 or above and subsequently selling when the indicator drop to the 20-25 range has proven to be uncanny in terms of market timing.  This doesn't mean that investors should follow this rule of thumb blindly.  Rather, the VIX should be something that investors pay attention to when making investment decisions. D I S C L A I M E R : The SmallCap Digest is an independent electronic publication committed to providing our readers with factual information on selected  publicly traded companies. SmallCap Digest is not a registered investment advisor or broker-dealer. 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