What Is the VIX? The Cboe Volatility Index Explained

VIX values are calculated using the CBOE-traded standard SPX options, which expire on the third Friday of each month, and the weekly SPX options, which expire on all other Fridays. Only SPX options are considered whose expiry period lies within more than 23 days and less than 37 days. In addition to being an index to measure volatility, traders can also trade VIX futures, options, and ETFs to what are pips hedge or speculate on volatility changes in the index. Sentiment plays a big role in decision making for the stock markets, and to that extent, it could be a good idea to glance at the VIX. However, the index is far from perfect, and investors should consider how much weight they want to peg on it.

Her analysis has been featured on CNBC, published in Forbes and SFO Magazine, syndicated to Yahoo Finance and MSN, and quoted in Barron’s, The Wall Street Journal, and USA Today. That said, there are plenty of VIX derivatives and VIX-linked exchange-traded products available for those looking to add long or short volatility exposure to their portfolios. Specifically, intraday VIX quotes are calculated from a basket of short-term SPX options that are weighted to maintain a constant average maturity of 30 days. Let’s take a closer look at some numbers for the VIX, to see what the option markets tell us about the stock market and mood of the investing crowd. During winter 2013, a time of strong stock market performance, the VIX was at around 12. But in March 2020, as a global panic about the COVID-19 pandemic peaked, the index reached a record 82.69.

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That much is understood by most investors, but what exactly is volatility and how is it measured for the overall stock market? You may have seen references to something called the VIX, an index that measures volatility, during times of extreme financial stress. In August 2024, the VIX jumped above 60, a level not seen since the market meltdown in the initial stages of COVID-19 in March 2020, as worries grow about a possible recession. At the time, the index only took into consideration the implied volatility of eight separate S&P 100 put and call options. After 2002, CBOE decided to expand the VIX to the S&P 500 to better capture the market sentiment.

How to Trade the VIX

The VIX measures implied volatility in the 30 days ahead for the S&P 500. VIX futures are contracts that allow traders to speculate on the future direction of the VIX index. These futures contracts have monthly expirations and can be used for hedging or speculating on future changes in market volatility. Being a forward-looking measure, the VIX is often used to predict future market volatility.

• Furthermore, VIX-related products can be susceptible to contango, a situation where the futures price is higher than the expected future spot price, which can lead to losses over time.
• It’s possible to buy futures contracts or exchange-traded funds (ETFs) and exchange-traded notes that own these futures contracts in an effort to mirror the index.
• The VIX has paved the way for using volatility as a tradable asset, albeit through derivative products.
• The VIX formula is calculated as the square root of the par variance swap rate over those first 30 days, also known as the risk-neutral expectation.
• The VIX, which was first introduced in 1993, is sometimes called the “fear index” because it can be used by traders and investors to gauge market sentiment and see how fearful, or uncertain, the market is.

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A rising VIX suggests that traders expect increased volatility, while a falling VIX indicates expectations of decreased volatility. Because the VIX tends to review stock market crashes: predictable and unpredictable and what to do about them be negatively correlated with the S&P 500, VIX futures and options can provide a hedge against equity market downturns, thus serving as a powerful tool for portfolio diversification. Bankrate.com is an independent, advertising-supported publisher and comparison service.

On the one hand, these products offer a way to profit from changes in market volatility, hedge against market downturns, and diversify a portfolio. On the other hand, they can be complex and risky, especially for inexperienced traders. Moreover, by observing the VIX, investors can gain insights into the market’s risk and fear levels, helping them make more informed investment fxcm broker decisions.

But to understand how the Volatility Index works, it’s helpful to have a basic understanding of options trading. When you purchase options, you’re buying the right (but not the obligation) to buy or sell a stock at a specified date and price. In times of uncertainty, investors will pay a premium for what’s essentially a form of insurance. Higher options prices across the overall stock market indicate that investors expect heightened volatility.

We may earn a commission when you click on a link or make a purchase through the links on our site. All of our content is based on objective analysis, and the opinions are our own. Hence, mastering the dynamics of the VIX provides a significant edge in navigating the complex world of financial markets. Moreover, in the realm of wealth management, the VIX serves as a powerful risk measurement tool. Conversely, a low VIX may signal an opportune time to implement more aggressive investment strategies.

NerdWallet does not and cannot guarantee the accuracy or applicability of any information in regard to your individual circumstances. Examples are hypothetical, and we encourage you to seek personalized advice from qualified professionals regarding specific investment issues. Our estimates are based on past market performance, and past performance is not a guarantee of future performance. Instead, investors can take a position in VIX through futures or options contracts, or through VIX-based exchange-traded products (ETPs).