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.

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.

• Perhaps the most costly misconception involves VIX-based investment products.
• Before trading options, please read Characteristics and Risks of Standardized Options.
• The (VIX) sits right in the middle of the Bollinger band, suggesting a good near-term balance between fear and complacency among traders.
• However, the VIX can be traded through futures contracts, exchange-traded funds (ETFs), and exchange-traded notes (ETNs) that own these futures contracts.
• Every week, he’ll send you easy-to-follow instructions that’ll put you on Wall Street’s payment list.

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.”

• 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.
• By the end, you’ll have a solid grasp of how the VIX can be integrated into your investment strategy to better manage market risks and potentially capitalize on market movements.
• This commentary offers generalized research, not personalized investment advice.
• The information contained herein should not be considered a recommendation to purchase or sell any particular security.
• Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

VIX index: How Wall Street’s ‘fear gauge’ measures stock market volatility

Are you at the beginning of your career and looking for long-term growth? While the formula is mathematically complex, it theoretically estimates the S&P 500 Index volatility by averaging the weighted prices of various SPX puts and calls across many strike prices. The VIX attempts to measure the magnitude of the S&P 500’s price movements (i.e., its volatility). The more dramatic the price swings in the index, the higher the level of volatility, and vice versa. The current reading on the VIX is 15.5 as of this writing, and the VIX has been relatively low since March 2023.

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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.

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.

How stock market volatility is measured

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.

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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 Forex timeframe 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.

Q. How do VIX options work?

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.

Profit and prosper with the best of Kiplinger’s advice on investing, taxes, retirement, personal finance and much more. As with any investing vehicles, traders should carefully consider the stated goals, suggested holding periods and liquidity of these instruments. 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. 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.

High VIX readings don’t automatically signal market bottoms, nor do low readings immediately precede tops. The index can remain at elevated or depressed levels much longer than investors expect, and using it in isolation for market timing often leads to premature or misguided investment decisions. Another common misunderstanding is treating VIX levels as absolute indicators that mean the same thing in all market conditions. What constitutes a “high” or “low” VIX reading varies significantly depending on the broader market environment, economic conditions, and historical context.

VIX values below 20 generally correspond to stable, stress-free periods in the markets. Because option prices are public, they can be used to determine the volatility of an underlying security. Such volatility, as implied by or inferred from market prices, is called forward-looking implied volatility (IV).

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.

A cross of the 20-period moving average around which the band is built signifies a coming overbought or oversold condition. For privacy and data protection related complaints please contact us at Please read our PRIVACY POLICY STATEMENT for more information on handling of personal data. “Chase Private Client” is the brand name for a banking and investment product and service offering, requiring a Chase Private Client Checking℠ account.

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.