The Fear and Greed Index

Tiffany Sun

July 4, 2025

The fear and greed index sounds like something to measure personality, maybe another MBTI-esque test, or a way to measure children’s behavior. In reality, the fear and greed index, contrary to what most people would imagine from its name, is a useful tool in the business world. With one end as fear and one end as greed, the index is honestly very simple, yet it can say a lot about the current stock market, stock prices, and investor moods.

The index was first developed by CNN, but has now been adopted across many platforms. It really is very understandable. The spectrum ranges from 0 to 100, with 0 signifying maximum fear and 100 signifying maximum greed. This entire spectrum is built on the basis that excessive fear drives stock prices down and slows the stock market, while excessive greed drives the stock market up, sometimes to unhealthy and unrealistic heights.

The index value is calculated based on 7 factors: market momentum, stock price strength, stock price breadth, put and call options, junk bond demand, market volatility, and safe haven demand. Each indicator has the same weighting, and they’re tracked closely to see how much they deviate from their averages compared to how much they usually deviate. 

Market momentum measures the S&P 500 performance relative to its 125-day weighted average. The S&P 500 is an index detailing the performance of the top 500 companies in the US, and thus is very important.

Stock price strength compares the number of stocks hitting 52-week highs compared to lows. More highs indicate investor optimism and, in turn, greed.

Stock price breadth is a general comparison of the volumes of rising stocks versus declining stocks. More rising stocks imply greater greed.

Put and call options measure the ratio of puts to calls. Puts are contracts that allow the buyer to sell an asset in the future, whereas calls are contracts that allow the buyer to purchase an asset. More puts than calls indicate greater fear.

Junk bond demand tracks the spread between yields of safe government bonds versus yields of high-return, high-risk junk bonds. A wider spread indicates greater caution amongst investors.

Market volatility is measured by the VIX index, which predicts price fluctuations in the S&P 500. High volatility implies greater fear.

Lastly, safe haven demand measures the performance of stocks compared to Treasury bonds. If bonds outperform stocks, that indicates caution and fear as investors choose the safer option.

Overall, the fear and greed index is updated constantly as new data is received. This index not only allows one to gauge the mood of the market and identify opportunities, but also brings awareness to investors about their own emotions and biases.

However, a word of caution: although the fear and greed index provides very valuable insight, it is only a general tool, and should not be the deciding factor in investment decisions.