VIX Definition, Overview of the CBOE Volatility Index

The prices used to calculate the price of the VIX are midpoints of real-time S&P 500 option bid/ask price quotations, according to Cboe. The VIX index attempts to measure how much volatility the S&P 500 index will experience over the next 30 days. Prior to joining NerdWallet in 2021, he spent several years as a licensed financial advisor with Bank of America/Merrill Lynch and Fisher Investments.

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  • Returns on both the ETFs and the ETNs are determined by the changing values of the underlying VIX futures contracts rather than by the changing value of VIX itself.
  • The Volatility Index — or VIX — measures how quickly the price of S&P 500 Index components is changing.
  • The VIX can also be combined with other market indicators to provide an even more definitive picture of the prevailing market sentiment.

Generally speaking, if the VIX index is at 12 or lower, the market is considered to be in a period of low volatility. On the other hand, abnormally high volatility is often seen as anything that is above 20. When you see the VIX above 30, that’s sometimes viewed as an indication that markets are very unsettled. The S&P 500® Index is a market-capitalization weighted index that consists of 500 widely traded stocks chosen for market size, liquidity, and industry group representation. “The VIX does not measure actual volatility, but rather, implied volatility.” We are committed to empowering market participants of all types with the information, data and tools they need to navigate the next generation of risk.

How Can I Use the VIX Level to Hedge Downside Risk?

The VIX traces its origin to the financial economics research of Menachem Brenner and Dan Galai. Volatility is one of the primary factors that affect stock and index michael r rosenberg 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.

When implied volatility is low, the VIX level is low and the range is narrow. Just keep in mind that with investing, there’s no way to predict future stock market performance or time the market. The VIX is merely a suggestion, and it’s been proven to be wrong about the future direction of markets nearly as often as it’s been right. That’s why most everyday investors are best served by regularly investing in diversified, low-cost index funds and letting dollar-cost averaging smooth out any pricing swings over the long term. One of the most popular and accessible of these is the ProShares VIX Short-Term Futures ETF , which is based on VIX futures contracts with a 30-day maturity. 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 , which invests in VIX futures with four- to seven-month maturities.

what is vix

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. is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. 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 offers, Bankrate does not include information about every financial or credit product or service.

The CBOE Volatility Index—also known as the VIX—is a primary gauge of stock market volatility. The VIX volatility index offers insight into how financial professionals are feeling about near-term market conditions. Understanding how the VIX works and what it’s saying can help short-term traders tweak their portfolios and get a feel for where the market is headed. Technical analysis focuses on market action — specifically, volume and price. When considering which stocks to buy or sell, you should use the approach that you’re most comfortable with.

Options are financial contracts that give holders the right to buy or sell an underlying asset — stocks, bonds, exchange-traded funds, contracts, etc. — at a certain price within a certain time period. Options prices for particular stocks are determined by the probability that the stock’s price will reach a certain level, known as the strike price 5 Best Crypto Wallets Of 2021 or exercise price. The VIX tracks the S&P 500 as opposed to other indexes because it is considered the leading indicator of future volatility in the overall US stock market. Volatility measures the magnitude of price fluctuations for a specified period of time. The VIX attempts to gauge the volatility expected for the next 30-days for the S&P 500.

Uses of the VIX Volatility Index

Like conventional indexes, the VIX Index calculation employs rules for selecting component options and a formula to calculate index values. Instead, VIX is traded and exchanged via derivative contract, derived ETFs, and ETNs which most commonly track VIX futures indexes. As a rule of thumb, VIX values greater than 30 are generally linked to large volatility resulting from increased uncertainty, risk, and investors’ fear. VIX values below 20 generally correspond to stable, stress-free periods in the markets. All such qualifying options should have valid nonzero bid and ask prices that represent the market perception of which options’ strike prices will be hit by the underlying stocks during the remaining time to expiry.

Determine which options contracts on the S&P 500 to include in the calculation. Since volatility is statistically defined as the square root of variance, the monthly volatility implied by VIX can be calculated by dividing its level by the square root of 12 because there are 12 months in a year. It can provide a positive return, although it pays no interest or dividends. But unlike most traditional asset classes, volatility is never a long-term investment. The value of shares and ETFs bought through a share dealing account can fall as well as rise, which could mean getting back less than you originally put in.

what is vix

Any increase in the value of the ETFs and ETNs they own can be used to offset portfolio losses or to realize a profit. By following the steps presented below, you can calculate where the market reasonably expects the S&P 500 to trade in 30 days. It’s information many investors use to make near-term trading decisions. The options used to calculate VIX are put and call options on the S&P 500.

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Trade options, they are essentially placing bets on where they think the price of a specific security will go. In many cases, large institutional investors will use options trading to hedge their current positions. So, if the big firms on Wall Street are anticipating an upswing or downswing in the broader market, they may try to hedge against that volatility by placing options trades. If many of the large investment firms are anticipating the same thing, there is usually a spike in options trading for the S&P 500.

what is vix

Corporate Bond Futures Broad coverage of the liquid U.S. high yield and investment grade corporate bond universes. IG International Limited is part of the IG Group and its ultimate parent company is IG Group Holdings Plc. IG International Limited receives services from other members of the IG Group including IG Markets Limited.

What VIX Measures

If held for too long a period, they lose their value, making them an unsuitable permanent hedge against market volatility. The VIX hit an all-time high of 82.69 on March 16, 2020, during the early days of the COVID-19 pandemic. The index’s second highest value (80.86) was reached on November 20, 2008, as markets reeled from the fallout over mortgage-backed securities. Before purchasing a security tied to an index like the VIX, it’s important how to trade double bottom pattern forex 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. The VIX index was introduced by the Chicago Board Options Exchange, or Cboe, as a way for investors to measure future price volatility for the S&P 500 index.

This means the returns may, and often do, diverge from the implied volatility indicated by the actual VIX level and from investors’ expectations. VIX, or the annualized 30-day implied volatility of the S&P 500, is calculated throughout each trading day by averaging the weighted u.s. forex brokers prices of a specific group of S&P 500 call and put options. As with other S&P DJI indices, the methodology used to calculate VIX is rigorous and transparent, though it differs from other indices in that it measures volatility rather than changes in security prices.

The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. VIX and the S&P 500 typically move in opposite directions, with VIX anticipating the S&P 500’s behavior 30 days out. Access exclusive data and research, personalize your experience, and sign up to receive email updates.

When the S&P 500 goes down, the market interprets this as fear in the market, which consequently pushes the VIX higher. This anticipation increases what investors in VIX futures are willing to pay for new contracts, creating a situation known as contango. When a market is in contango, the price of a futures contract with a later expiration date is higher than the spot price of the current contract. Each of these products works differently, attracts investors for different reasons, and poses different potential risks. What links them, however, is that as equity markets fall, VIX rises, prompting a corresponding though not identical change in the value of products linked to VIX.

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However, other works have countered that these critiques failed to correctly implement the more complicated models. Performance of VIX compared to past volatility as 30-day volatility predictors, for the period of Jan 1990-Sep 2009. Volatility is measured as the standard deviation of S&P500 one-day returns over a month’s period. The blue lines indicate linear regressions, resulting in the correlation coefficients r shown. Note that VIX has virtually the same predictive power as past volatility, insofar as the shown correlation coefficients are nearly identical. The Cboe VIX of VIX, or VVIX, is a measure of the short-term volatility of the Cboe Global Markets Volatility Index .