The more pronounced the options price swings on the S&P 500, the higher the risk of stock market volatility and the higher the VIX climbs — a signal that a crash may be imminent. Before we try to understand how the VIX is calculated, it’s important to grasp the basics of options contracts. You pay a premium for the right, but not the obligation, to buy or sell a stock at a specific price (called the strike price) by a specific date (the expiration date).
Why the Stock Market’s ‘Fear Index’ Has Normalized Faster Than Ever Before
Learn how the VIX works, how it’s calculated, and what a high or low VIX could mean for your investments. The VIX, formally known as the Chicago Board Options Exchange (CBOE) Volatility Index, measures how much volatility professional investors think the S&P 500 index will experience over the next 30 days. 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.
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. Profit and prosper with the best of Kiplinger’s advice on investing, taxes, retirement, personal finance and much more. Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more – straight to your e-mail. Julie Myhre-Nunes leads the Home Services team, covering home improvement, home warranties, home security, solar and moving. Before joining NerdWallet, she led editorial teams at Red Ventures and several startups. Her personal finance insights have been featured in Forbes, The Boston Globe and CNBC, while her writing has appeared in USA Today, Business Insider, Wired Insights and more.
- 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.
- Get the trends and expert predictions you need to stay ahead of the markets.
- 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.
- VIX is the ticker symbol and popular name for the Chicago Board Options Exchange’s CBOE Volatility Index, a popular measure of the stock market’s expectation of volatility based on S&P 500 index options.
- Yes, investors often use the VIX as a hedge against other portfolio assets, speculating on or mitigating the impact of volatility.
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 Cboe Volatility Index – frequently referred to by its ticker symbol, “the VIX” — is a real-time measure of implied volatility on the benchmark S&P 500 Index (SPX). Not only is the VIX used as a quick gauge of short-term investor sentiment, it’s also the basis of many active investing strategies, from portfolio hedging to directional speculation. It’s important to emphasize, however, that the VIX measures implied volatility, i.e., the level of volatility the market is anticipating.
Monthly and weekly expirations in VIX options are available and trade during U.S. regular trading hours and during a limited global trading hours session. Specifically, the prices used to calculate VIX Index values are midpoints of real-time SPX option bid/ask price quotations. This means that the index has a 66.7% probability (or within one standard deviation) of trading within a range 30% higher OR lower than its current level, over the next year. The VIX recorded a record high spike on August 5, 2024, when it jumped 42 points to 65.73 intraday as markets around the world experienced sell offs and recession fears rose.
Cboe Volatility Index (VIX) or the Fear Index: Explanation and Calculation
For instance, a stock having 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 appropriate proportion to correctly price their options trades. In addition to being an index to measure volatility, traders can also trade VIX futures, options, and ETFs to hedge or speculate on volatility changes in the index. Volatility measures the frequency and magnitude of price movements, both up and down, that a financial instrument experiences over a certain period of time.
Imagine the stock market has been steadily climbing for months, and the VIX index is hovering around 12. However, news breaks that a major global event (e.g., a geopolitical crisis, a major economic announcement) is imminent. Investors become concerned about the potential impact on the market and start buying put options to protect their portfolios. This signals increased uncertainty and the potential for a market correction. However, in recent decades, new financial products have transformed volatility into an asset that can be traded. This shift began in earnest with the introduction of VIX futures in 2004 and VIX options in 2006 by the Chicago Board Options Exchange.
Volatility measures the frequency and magnitude of price movements over time. The more rapid and substantial the price changes, the greater the volatility. Volatility can be measured using actual historical price changes (realized volatility) or it can be a measure of expected future volatility that is implied by option prices. 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 reading doesn’t guarantee market stability.
VIX index: How Wall Street’s ‘fear gauge’ measures stock market volatility
However, whether the VIX is considered low is relative and depends also on what’s been happening recently. So if the VIX is lower compared to recent levels, it may be considered a low value for that time period. 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. There’s more to it, but basically, the VIX is calculated as the square root of the expectation of price changes in the S&P 500 over the next 30 days. It’s important to note here that while volatility can have negative connotations, like greater risk, more stress, deeper uncertainty or bigger market declines, volatility itself is a neutral term.
How we make money
- There’s no crystal ball for the stock market, but there are indexes that help investors gauge expected risk.
- 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.
- Also, traders can engage in volatility arbitrage by taking positions in VIX futures and offset these positions with VIX-related products.
- The Cboe Volatility Index, or VIX, is a benchmark used to measure the expected future volatility of the S&P 500 index.
- A high VIX reading doesn’t necessarily mean stocks will fall, just as a low reading doesn’t guarantee market stability.
Supporting documentation for any claims, if applicable, will be furnished upon request. Before purchasing a security tied to an index like the VIX, it’s important to understand all of your options so that you can make educated decisions about your investment choices. If you’re interested in investing in a VIX ETF/ETN, we recommend that you speak with a financial professional first to make sure your investment strategy fits your needs. In 2025, major stock indexes like the S&P 500 have whipsawed as markets have reacted to the ever-changing news about new tariffs. If you’ve been following financial news, you may have heard the word “volatility” being thrown around a lot — and trust fx broker review you may have heard a reference to a volatility measurement called the VIX.
Unless otherwise noted, the opinions provided are those of the speaker or author and not necessarily those of Fidelity Investments or its affiliates. Meanwhile, the IAI, which also has proven to be a leading indicator to the VIX, has shown some divergence. During the time period mentioned above, despite some concerns about the market, the overall IAI actually moved lower. Miranda Marquit has been covering personal finance, investing and business topics for almost 15 years.
For example, on Nov. 9, 2017, the VIX climbed 22% during the trading session on Financial Intelligence, Revised Edition fears of delays in the tax reform plan. As the derivatives markets matured, 10 years later, in 2003, the CBOE teamed up with Goldman Sachs and updated the methodology to calculate VIX differently.
The money management forex VIX is typically used to measure short-term investor sentiment, but many also use the index as a foundation for active investing strategies. Before investing in any VIX exchange-traded products, you should understand some of the issues that can come with them. Certain VIX-based ETNs and ETFs have less liquidity than you’d expect from more familiar exchange traded securities. ETNs in particular can be less liquid and more difficult to trade as well as may carry higher fees.
Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range, can also impact how and where products appear on this site. While we strive to provide a wide range of offers, Bankrate does not include information about every financial or credit product or service. 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.