Get analysis on VIX Options and the rest of the U.S.-listed options market with Cboe LiveVol analytics platforms. LiveVol’s web-based platforms provide everything you need to quickly analyze trading activity and identify opportunities. Some of these indices were leveraged, resulting in even sharper fluctuations and providing riskier opportunities for profits and losses. The peak in March 2020 as Covid-19 took hold across the world coincided with the sharpest fall in the S&P 500’s history. In the days after Russia invaded Ukraine, the S&P fell to its lowest level since the peak of the Covid-19 crisis, lifting the VIX futures index simultaneously to hit a two-year peak.

The CBOE Volatility Index (VIX), often referred to as the “Fear Index,” provides a benchmark for the market’s future volatility expectations. It is a critical tool for investors and traders to assess market risk and sentiment, helping them make informed decisions. As the VIX tends to rise when markets decline and fall when they advance, it serves as an inverse indicator of market trends. 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. In the case of the stock market the term volatility refers to a statistical measurement of the degree of change in the prices of stock market products over time.

What Are the Trading Strategies Commonly Used with the VIX?

The index is expressed as a percentage and represents the expected annualized movement of the S&P 500 during the upcoming 30 days. For example, when the index stands at 36, it indicates that the expected movement in the S&P 500 in the next 30 days is 3% (i.e., 36% divided by 12 months). The result is the VIX value, representing the market’s expectation of 30-day volatility. “But it’s so important to hammer home, especially when you have all these rotations,” that is, movements of investments from one sector to the next. These “frankly give you more opportunity to use volatility to your advantage via that process of rebalancing.” Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018.

How Can an Investor Trade the VIX?

Please note that past performance is not a reliable indicator of future results. Throughout its existence, the VIX has served as an invaluable witness to major market events. During the 1987 Black Monday crash, estimates suggest the index would have reached approximately 150 had it existed then. More recently, it hit dramatic peaks of 89.53 during the 2008 Financial Crisis and 82.69 amid the 2020 COVID-19 market crash.

But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you. Any estimates based on past performance do not a guarantee future performance, and prior to making any investment you should discuss your specific investment needs or seek advice from a qualified professional. Options and futures based on VIX products are available for trading on the CBOE and CFE platforms, respectively.

• When the market is showing an upward trend, there appears to be less volatility as the investors’ confidence increases, and they tend to buy more calls rather than puts.
• 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.
• Instead, it measures the market’s expectations of future volatility over the next 30 days.
• It’s also linked to an index comprising short-term futures, so it may be most appropriate for those looking to place a short-term bet against the market rather than a long-term hold.

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. Instead, investors can take a position in VIX through futures or options contracts, or through VIX-based exchange-traded products (ETPs). 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. Instead, it measures the market’s expectations of future volatility over the next 30 days. The VIX helps investors understand market sentiment when making investment decisions and also can be used to help protect a portfolio from the impact of big market swings.

• In times of uncertainty, investors will pay a premium for what’s essentially a form of insurance.
• In reality, the VIX simply measures expected volatility – the magnitude of potential price movements – without indicating direction.
• The midpoints of the bid and ask prices of options are considered for index calculations.
• Thus, in a bullish market, VIX is generally lower due to less volatility, and in a bearish market, VIX is higher due to unrest.

Examples of how investors use the volatility index

Several of these products employ leverage and are deemed by regulators to be used only for intra-day trading, not held for longer periods. The average price of crude oil can fluctuate due to political, geographical, and social circumstances. Between 2020 and 2022, the price jumped from $-40 to almost $100, suggesting how external events like war and health crises can impact on the commodity. If you’re feeling apprehensive about trading on such volatility within the market, you can open a risk-free demo account, which allows you to practise first with $10,000 worth of virtual funds.

How the VIX Index Works (Simplified)

A rising VIX indicates that traders expect the S&P 500 Index to become more volatile. The higher the VIX, the higher the fear, which, according to market contrarians, is considered a buy signal. A falling VIX indicates that traders in the options market expect the S&P 500 Index to trade more quietly.

This means the higher the perceived level of risk — for example, in times of high uncertainty, such as during the Covid-19 pandemic or the Russian invasion of Ukraine — the higher the VIX price climbs. When equity markets seem stable and stocks are high, premiums on options decline, alongside volatility instruments like the VIX. Many investors mistakenly believe that the VIX can predict which way the market will move. In reality, the VIX simply measures expected volatility – the magnitude of potential price movements – without indicating direction. A high VIX reading doesn’t necessarily mean stocks will fall, just as a low Forex trading bot reading doesn’t guarantee market stability. The index merely tells us how much movement investors expect, whether up or down.

The VIX calculated the expected volatility based on the call and put option prices of S&P 500 stocks. The weighted average prices of the S&P 500 put, and call options are added together for several strike prices. The midpoints of the bid and ask prices of options are considered for index calculations. The VIX Index, or Volatility Index, was developed by the Chicago Board Options Exchange (CBOE) and serves as a vital tool for investors seeking to understand market sentiment and potential fluctuations in stock prices.

Alternatively, VIX options may provide similar means to position a portfolio for potential increases or decreases in anticipated volatility. The VIX volatility index does not record volatility – it forecasts it, based on data around options. The data it gathers implies how much volatility there is likely to be within the next 30 days and is an extremely useful pointer. But traders should take into account that while it is an effective tool based on solid data, it is a forecast, not a fact. The greater the risk, the more people are willing to pay for ‘insurance’ in the form of options.

Cboe® Volatility Index

These calculations produce a quantifiable measure of market outlook and volatility for the following 30 days. In more practical terms, the VIX uses option prices to estimate how volatile the market will be in the coming month, and then extrapolates that to the next 12 months. It looks at both put and call options on the S&P 500 index, focusing on those with strike prices near the market level and expiration dates coming soon. The prices of these options reflect traders’ expectations of future market movements. The Chicago Board Options Exchange Volatility Index, or VIX, is an index that gauges the volatility investors expect in the U.S. stock market.

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 much an asset’s price moves in either direction and is often used to measure the riskiness of an asset or security. It’s derived from the prices of S&P 500 index options and also represents an expected percentage trading range for the upcoming 12-month period. The VIX typically has an inverse relationship with the S&P 500, rising when stocks fall and vice versa, which makes it a valuable tool for assessing market stress and potential turning points.

Volatility index or VIX is the measurement or an indicator of the volatility in the market. The Chicago Board of Options Exchange (CBOE) creates and tracks the VIX which shows the implied volatility of S&P 500 index options. On the contrary, a high VIX indicates high volatility and traders keep a close eye on this index to incorporate their volatility index trading accordingly. The most common strategy is to buy when the VIX is high and sell when it is low while considering other indicators and factors.

But VIX-tracking funds are typically used by day traders and tend to be extraordinarily risky. The VIX can help investors predict short-term performance, but the fluctuations shouldn’t concern long-term investors. These prices reflect how much investors are willing to pay for protection against market swings. When uncertainty increases, the demand for options increases—and so do their premiums—leading to a higher VIX. Welcome to your go-to place for information about the VIX® complex, including VIX options and futures. Before we try to understand how the VIX is calculated, it’s important to grasp the basics of options contracts.

The VIX is often called the “fear gauge” because it tends to rise when market uncertainty and fear increase, reflecting higher expected volatility. Yes, external events such as geopolitical tensions, economic data releases, and global crises can impact market sentiment and contribute to changes in the volatility index. Two kinds of S&P options are considered for VIX, i.e., those that expire on the third Friday of every month and those that expire every Friday. The weighted average of the options prices is then calculated to determine the index value per CBOE. But for those who are more inclined to trade and speculate, ETFs that track the VIX can be a useful tool.