CBOE Volatility Index VIX: What Does It Measure in Investing?

As the VIX is the most widely watched measure of broad market volatility, it has a substantial impact on option prices or premiums. A higher VIX means higher prices for options (i.e., more expensive option premiums) while a lower VIX means lower option prices or cheaper premiums. The index is more commonly known by its ticker symbol and is often referred to simply as “the VIX.” It was created by the CBOE Options Exchange and is maintained by CBOE Global Markets. It is an important index in the world of trading and investment because it provides a quantifiable measure of market risk and investors’ sentiments. The S&P 500’s options market has been buzzing as investors brace for uncertainties like recession fears and conflicting signals from central banks, particularly the Federal Reserve and the Bank of Japan. This demand for protection has made SPY put options pricey, with their skew—a measure of demand for downside protection—hitting elevated levels.

VIX-related financial products include VIX futures, options, Exchange-Traded Funds (ETFs), and Exchange-Traded Notes (ETNs). These products allow investors to trade volatility directly, providing opportunities for hedging, speculation, and portfolio diversification. Expressing a long or short sentiment may involve buying or selling VIX futures. Alternatively, VIX options may provide similar means to position a portfolio for potential increases or decreases in anticipated volatility. NerdWallet, Inc. is an independent publisher and comparison service, not an investment advisor. Its articles, interactive tools and other content are provided to you for free, as self-help tools and for informational purposes only.

• It's a statistical measure of dispersion and is often expressed through the standard deviation or variance between returns from the same security or market index.
• Conversely, a low VIX may signal an opportune time to implement more aggressive investment strategies.
• Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications.
• When the VIX declines, investors are betting there will be smaller price moves up or down in the S&P 500, which implies calmer markets and less uncertainty.
• Prices are weighted to gauge whether investors believe the S&P 500 index will be gaining ground or losing value over the near term.

HomeVIX Volatility Products

One criticism lies in its calculation, which is based on the implied volatilities of S&P 500 index options. It doesn't consider real-world events or the actual volatility of individual stocks, making it a somewhat abstract measure. VIX options are derivative securities that grant the holder the right, but not the obligation, to buy (call option) or sell (put option) the VIX at a predetermined price before a specific date. This inverse relationship makes the VIX an invaluable tool for gauging market sentiment. The VIX Index calculation aims to depict expected future volatility by aggregating the weighted prices of many S&P 500 put and call options. Investors, analysts, and portfolio managers look to the Cboe Volatility Index as a way to measure market stress before they make decisions.

VIX as a Risk Measurement Tool

When the stock markets appear relatively calm but the VIX index spikes higher, professionals are betting that prices on the S&P limefx 500—and thereby the stock market as a whole—may be moving higher or lower in the near term. When the VIX moves lower, investors may view this as a sign the index is reverting to the mean, with the period of greater volatility soon to end. For people watching the VIX index, it’s understood that the S&P 500 stands in for “the stock market” or “the market” as a whole. When the VIX index moves higher, this reflects the fact that professional investors are responding to more price volatility in the S&P 500 in particular and markets more generally. When the VIX declines, investors are betting there will be smaller price moves up or down in the S&P 500, which implies calmer markets and less uncertainty.

In simple terms, the analysts believe this strategy lets investors stay prepared for market shocks without overpaying for protection. The setup is designed to be premium-neutral, meaning no additional upfront costs, while targeting a sweet spot in relative value. This approach balances the premium costs alpho forex broker review and offers a smart hedge if the markets turn turbulent. The current version of the VIX, which has been in popular use since 2003, offers a more comprehensive look at options IV by considering a range of near-the-money call and put strikes on the broader S&P 500. This cost of borrowing money can be important to both your personal finances and evaluating a company.

Stock Futures Rise as Republicans Win the House

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. The VIX typically spikes during or in anticipation of a stock market correction. The VIX is an index run by the Chicago Board Options Exchange, now known as Cboe, that measures the stock market’s expectation for volatility over the next 30 days based on option prices for the S&P 500 stock index. Volatility is a statistical measure based on how Ethereum cfd much an asset’s price moves in either direction and is often used to measure the riskiness of an asset or security. Technically speaking, the CBOE Volatility Index does not measure the same kind of volatility as most other indicators. Volatility is the level of price fluctuations that can be observed by looking at past data.

Some exchange-traded securities let you speculate on implied volatility up to six months in the future, such as the iPath S&P 500 VIX Mid-Term Futures ETN (VXZ), which invests in VIX futures with four- to seven-month maturities. The Cboe lists options contracts that derive their value from short-term VIX futures, and call options on VIX can be used to hedge equity portfolios in the expectation that VIX and stocks will continue to diverge over time. VIX calls and puts can also be used to bet on directional moves in the index itself, though traders should be aware of the unique expiry and settlement rules pertaining to VIX options. It’s important to emphasize, however, that the VIX measures implied volatility, i.e., the level of volatility the market is anticipating. Although the index can provide helpful information, investor sentiment isn’t always correct.

Thus, it can inform decisions around risk tolerance, asset allocation, and portfolio diversification. High VIX levels typically indicate increased fear among investors, while low VIX levels suggest complacency. The VIX was introduced by the CBOE in 1993, providing the first standard tool for tracking market volatility.

The CBOE Volatility Index (VIX) is a real-time index that represents the market’s expectations for the relative strength of near-term price changes of the S&P 500 Index (SPX). Because it is derived from the prices of SPX index options with near-term expiration dates, it generates a 30-day forward projection of volatility. Volatility, or how fast prices change, is often seen as a way to gauge market sentiment, and in particular the degree of fear among market participants. VIX-related financial products include VIX futures, options, ETFs, and ETNs. These products allow investors to trade volatility directly, offering opportunities for hedging, speculation, and portfolio diversification. By indicating the market's anticipated volatility, it provides a sense of the risk and uncertainty perceived by investors, which can inform decisions around risk tolerance, asset allocation, and portfolio diversification.

It is a measure of the level of implied volatility, not historical or statistical volatility, of a wide range of options, based on the S&P 500. This indicator is known as the "investor fear gauge," because it reflects investors' best predictions of near-term market volatility, or risk. In general, VIX starts to rise during times of financial stress and lessens as investors become complacent. However, it’s impossible to purchase a basket of securities that track the VIX.

History shows, however, that complacent investors may be punished with falling prices, unless they heed the warnings of this quite reliable indicator. It's interesting to note that the VXN, which is the symbol for the implied volatility index of the Nasdaq 100 index, is even more bearish at the end of the summer of 2003. In Figure 2, the VXN, which is calculated the same way as the VIX, dropped to levels not seen since the complacent summer of 1998, when the VXN was below 29.5. While there are other factors at work, in most cases, a high VIX reflects increased investor fear and a low VIX suggests complacency.

The CBOE Volatility Index (VIX) is a measure of expected price fluctuations in the S&P 500 Index options over the next 30 days. The VIX, often referred to as the "fear index," is calculated in real time by the Chicago Board Options Exchange (CBOE). In addition to VIX options, various VIX-based exchange-traded products (ETPs) exist that track the price action of the index itself and/or some combination of its futures — whether directly, inversely or in a leveraged manner. Some of the more popular and active of these include the iPath Series B S&P 500 VIX Short Term Futures ETN (VXX), the ProShares Ultra VIX Short-Term Futures ETF (UVXY) and the Short VIX Short-Term Futures ETF (SVXY). But VIX-tracking funds are typically used by day traders and tend to be extraordinarily risky.