What Is the VIX? This ‘Fear Index’ is Used for Active Investing

The year 2003 marked a pivotal moment in the VIX’s evolution when it underwent a significant methodology update, shifting its calculation to S&P 500 (SPX) options. This transformation made the index more comprehensive and representative of broader market sentiment. It’s a contract that allows investors to buy or sell a certain security at a certain price until a certain time—it’s like a bet on which way they think an investment’s price will move. Cboe uses the real-time data from options prices and quotes on its exchange to create a measure of how much the S&P 500’s price is expected to move in the near future. Whichever funds catch your eye, it’s important to understand that there are many funds that track the same indexes but charge different fees.

CBOE Volatility Index (VIX): an important indicator in the financial markets

With a market-cap weighting, there is less need for buying and selling to keep the fund aligned with its target. However, large-cap assets can have an outsized impact on the performance of both the index and any fund that tracks it. Active traders who employ their own trading strategies and advanced algorithms use VIX values to price the derivatives, which are based on stocks with high beta. Beta represents how much a particular stock price can move with respect to the activity of the broader market index. As a rule of thumb, VIX values greater than 30 are generally linked to significant volatility resulting from increased uncertainty, risk, and investors’ fear.

Whether you’re a seasoned options trader or a novice investor, you’re likely aware that volatility plays a significant role in the market. Morgan Wealth Plan can help focus your efforts on achieving your financial goals. Through Wealth Plan, you can connect with an advisor to help you create a plan, adjust your financial strategy, and track your progress. Funding for education can come from any combination of options and a J.P. Morgan advisor can help you understand the benefits and disadvantages of each one. Compare among 529 Plans, custodial accounts, financial aid and other education options to help meet your college planning goals.

Understanding the CBOE Volatility Index (VIX) in Investing

In normal market conditions, the VIX typically oscillates between 15 and 20, with readings above 30 signaling significant market stress. Views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Unless otherwise noted, the opinions provided are those of the speaker or author and not necessarily those of Fidelity Investments or its affiliates. It tells us how nervous investors are and how much they’re willing to pay for insurance.

Q. Can the VIX predict market crashes?

Investors follow indexes to get a grasp on how markets are performing. Downside risk can be adequately hedged by buying put options, the price of which depends on market volatility. Astute investors tend to buy options when the VIX is relatively low and put premiums are cheap. Volatility is one of the primary factors that affect stock and index options’ prices and premiums. As the VIX is the most widely watched measure of broad market volatility, it has a substantial impact on option prices or premiums.

While it often overshoots during stressful periods, that overreaction can be a source of return for active investors. Generally, yes, though with a tendency to overestimate risk in the wake of spikes. That’s because volatility often mean-reverts after extreme moves, leading investors to overpay for protection just after it was most needed. With two decades of business and finance journalism experience, Ben has covered breaking market news, written on equity markets for Investopedia, and edited personal finance content for Bankrate and LendingTree.

• Fund managers create portfolios that mirror the makeup of their target index with a goal of duplicating its performance.
• Essentially, the VIX index is a forward-looking measure of how much the market expects the S&P 500 to fluctuate over the next 30 days, expressed as an annualized percentage.
• Products, accounts and services are offered through different service models (for example, self-directed, full-service).
• Generally, the higher the VIX (as a result of increased options demand and thus prices), the less certainty investors have about future prices in the US stock market over the next 30 days.
• Instead, managers of an index fund merely attempt to duplicate the performance of their target index.
• It then started using a wider set of options based on the broader S&P 500 Index, an expansion that allows for a more accurate view of investors’ expectations of future market volatility.

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 between 23 and 37 days. The CBOE Volatility Index (VIX), also known as the Fear Index, measures expected market volatility using a portfolio of options on the S&P 500. Given the differing factors driving the day-to-day action in each index, the VIX and the SPX are generally expected to maintain an inverse correlation with one another. As such, many analysts and market watchers track the VIX as a contemporaneous indicator of investor sentiment, and it’s often referred to casually as the “fear gauge.”

This strategy requires fewer managerial resources and less trading, which means index funds usually charge lower fees than actively managed mutual funds. The S&P 500 is the most widely followed market index, as it tracks the stock prices of 500 of the largest U.S. public companies. This group of stocks represents about 80% of the market capitalization of all stocks traded in the U.S., and it is commonly referred to as a stand-in for the entire U.S. stock market. For instance, a stock with a beta of +1.5 indicates that it is theoretically 50% more volatile than the market. Traders making bets through options of such high beta stocks utilize the VIX volatility values in proportion to correctly price their options trades. Following the popularity of the VIX, the CBOE now offers several other variants for measuring broad market volatility.

How To Use The VIX Index: Practical Applications For Investors

The derivatives market then had limited activity and was still growing. 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. Investing in the VIX directly is not possible, but you can purchase ETFs that track the index as a way to speculate on future changes in the VIX or as a tool for hedging. This isn’t something that will make sense for most investors who are working to meet a long-term goal such as saving for retirement. You may have seen references to something called the VIX, an index that measures volatility, during times of extreme financial stress. The VIX has soared in April, briefly going above 60, as investors worry about the possible economic shock from global tariffs.

The reality is the VIX has no publicly listed shares and cannot be traded directly in the same way as a company’s stock. Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more – straight to your e-mail. 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. Before we address the VIX, we should understand that volatility simply refers to the rate and magnitude of price changes.

While the index isn’t tradable, investors can engage with VIX-linked products such as futures, options, ETFs, and ETNs to leverage its movements. Understanding VIX levels, particularly those above 30, which indicate high market volatility, can guide investors in hedging strategies and pricing derivatives. The Cboe Volatility Index, or the “VIX,” is a measure of the US stock market’s 30-day expected volatility—or how much and how quickly stock prices are anticipated to change.

• This transformation made the index more comprehensive and representative of broader market sentiment.
• It can offer a sense of future volatility, or how bumpy things could get, for the US stock market over the next 30 days.
• The derivatives market then had limited activity and was still growing.

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 higher the VIX, the greater the level of fear and uncertainty in the market, with levels above 30 indicating tremendous uncertainty. It then started using a wider set of options based on the broader S&P 500 Index, an expansion that allows for a more accurate view of investors’ expectations of future market volatility. A methodology was adopted that remains in effect and is also used for calculating various other variants of the volatility index.

Before trading options, please read Characteristics and Risks of Standardized Options. Supporting documentation for any claims, if applicable, will be furnished upon request. This material is not financial or tax advice or Forex easy an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security. Forward looking statements cannot be guaranteed and all calculations may change due to changes in facts and circumstances. An equal-weight index gives the same weighting in its calculation to each asset it tracks, independent of price or market cap, large or small.

How To Stay Updated On The Stock Market (Without Getting Overwhelmed)

The VIX has paved the way for using volatility as a tradable asset, albeit through derivative products. CBOE launched the first VIX-based exchange-traded futures contract in March 2004, followed by the launch of VIX options in February 2006. But for those who are more inclined to trade and speculate, ETFs that track the VIX can be a useful tool. When uncertainty and fear hits the market, stocks generally fall, and your portfolio could take a hit.

Perhaps the most costly misconception involves VIX-based investment products. Many investors assume that VIX ETFs and futures will perfectly mirror the performance of the VIX index itself. These products often behave quite differently from the underlying index due to factors like contango, backwardation, and their own structural characteristics. The complex nature of these derivatives means their returns can significantly deviate from what investors might expect based on VIX movements alone. Cboe uses a complex calculation to arrive at the VIX—a number that changes in real-time throughout the day like stock and other index prices. The calculation takes into account the real-time average prices between the bid and ask for options with various future expiration dates.

The (VIX) sits right in the middle of the Bollinger band, suggesting a good near-term balance between fear and complacency among traders. The market is overly complacent when the Volatility Index goes above the upper Bollinger band. The market is overly fearful when it goes below the lower Bollinger band.