That said, there are plenty of VIX derivatives and VIX-linked exchange-traded products available for those looking to add long or short volatility exposure to their portfolios. 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.” During winter 2013, a time of strong stock market performance, the VIX was at around 12. But in March 2020, as a global panic about the COVID-19 pandemic peaked, the index reached a record 82.69. Founded in 1993, The Motley Fool is a financial services company dedicated to making the world smarter, happier, and richer.

As with any investing Dual Momentum Investing vehicles, traders should carefully consider the stated goals, suggested holding periods and liquidity of these instruments. The Motley Fool reaches millions of people every month through our premium investing solutions, free guidance and market analysis on Fool.com, top-rated podcasts, and non-profit The Motley Fool Foundation. 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. 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.

• Greater volatility means that an index or security is seeing bigger price changes—higher or lower—over shorter periods of time.
• During the 1987 Black Monday crash, estimates suggest the index would have reached approximately 150 had it existed then.
• True to its name, the S&P 500 index is composed of 500 of the largest publicly traded companies in the U.S.
• When it’s time for a correction, “you’re holding a much heavier bag than you otherwise would have.”

Because the volatility index tends to rise when the S&P 500 falls, investors might do so if they’re bearish on the stock market. Or they may take a position in a VIX-linked product for portfolio diversification or as a hedging strategy. 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. The VIX typically spikes during or in anticipation of a stock market correction.

• 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.
• We believe everyone should be able to make financial decisions with confidence.
• This signals increased uncertainty and the potential for a market correction.
• A volatility index is a measure of a particular market’s likelihood of making sudden, unexpected price movements, or its relative instability.
• The index’s second highest value, 80.86, was reached on November 20, 2008, as markets reeled from the fallout over mortgage-backed securities.

The VIX is based on the prices of options on the S&P 500 Index and is calculated by aggregating weighted prices of the index’s call and put options over a wide range of strike prices. 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. Often referred to as the “fear gauge,” the VIX captures the market’s expectations of volatility over the next 30 days, as implied by options on the S&P 500 Index.

Term Structure Trading

When you purchase options, you’re buying the right (but not the obligation) to buy or sell a stock at a specified date and price. In times of uncertainty, investors will pay a premium for what’s essentially a form of insurance. Higher options prices across the overall stock market indicate that investors expect heightened volatility. Prices are weighted to gauge whether investors believe the S&P 500 index will be gaining ground or losing value over the near term. The CBOE Volatility Index (VIX) quantifies market expectations of volatility, providing investors and traders with insight into market sentiment.

VIX® Index Charts & Data

As the range of strike prices for puts and calls on the S&P 500 increases, it indicates that the investors placing the options trades are predicting some price movement up or down. Typically, the performance of the VIX index and the S&P 500 are inversely related to each other. In other words, when the price of VIX is going up, the price of the S&P 500 is usually heading south. The VIX index tracks the tendency of the S&P 500 to move away from and then revert to the mean. When the stock markets appear relatively calm but the VIX index spikes higher, professionals are betting that prices on the S&P 500—and thereby the stock market as a whole—may be moving higher or lower in the near term. When the VIX moves lower, investors may view this as a sign the index is reverting to the mean, with the period of greater volatility soon to end.

Long/Short Volatility

Perhaps the most costly misconception involves VIX-based metatrader 5 for mac 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. Sonders said the VIX can be used for portfolio rebalancing and risk management.

Investors, analysts, and portfolio managers look to the VIX to measure market stress before they make decisions. When the VIX is higher, this indicates greater expected volatility, which generally correlates with market fear. Market participants are more likely to pursue lower-risk investment strategies in such situations. Contrary to popular belief, the VIX doesn’t measure actual market volatility. Instead, it measures the market’s expectations of future volatility over the next 30 days. The CBOE Volatility Index (VIX) is a measure of expected price fluctuations in the S&P 500 Index options over the next 30 days.

It’s simply a statistical measure of price changes for a security or an index. Greater volatility means that an index or security is seeing bigger price changes—higher or lower—over shorter periods of time. For people watching the VIX index, it’s understood that the S&P 500 stands in for “the stock market” or “the market” as a whole. When the VIX index moves higher, this reflects the fact that professional investors are responding to more price volatility in the S&P 500 in particular and markets more generally. When the VIX declines, investors are betting there will be smaller price moves up or down in the S&P 500, which implies calmer markets and less uncertainty.

Vanguard Total World Stock ETF (VT): How to Buy

Because of this, the Volatility Index (VIX) is a crucial tool for investors. Often referred to pepperstone broker as Wall Street’s “fear gauge,” the VIX provides insights into market volatility and investor sentiment. However, it’s impossible to purchase a basket of securities that track the VIX. It’s possible to buy futures contracts or exchange-traded funds (ETFs) and exchange-traded notes that own these futures contracts in an effort to mirror the index.

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. The Chicago Board Options Exchange Volatility Index, commonly known as the VIX, emerged in 1993 as a groundbreaking tool that would forever change how investors measure and interpret market fear. Commissioned by the CBOE and developed by Professor Robert Whaley, the index initially focused on S&P 100 (OEX) options before evolving into its current form. First introduced by the Chicago Board Options Exchange (Cboe) in 1993, the initial version of the VIX reflected a rolling 30-day calculation of at-the-money implied volatility (IV) on S&P 100 Index (OEX) options. This calculation is no longer widely used or tracked, but the “old VIX” is still available under the ticker symbol VXO.

VIX vs. S&P 500 Price

These instruments allow investors to gain exposure to volatility, making it possible to manage risk more effectively or to capitalize on expected changes in market conditions without directly holding the underlying assets. At the time, the index only considered the implied volatility of eight separate S&P 100 put and call options. After 2002, Cboe based the VIX on S&P 500 options to better capture market sentiment. The Cboe lists options contracts that derive their value from short-term VIX futures, and call options on VIX can be used to hedge equity portfolios in the expectation that VIX and stocks will continue to diverge over time. VIX calls and puts can also be used to bet on directional moves in the index itself, though traders should be aware of the unique expiry and settlement rules pertaining to VIX options.

This may influence which products we review and write about (and where those products appear on the site), but it in no way affects our recommendations or advice, which are grounded in thousands of hours of research. Our partners cannot pay us to guarantee favorable reviews of their products or services. Following the popularity of the VIX, the CBOE now offers several other variants for measuring broad market volatility. Historically speaking, a VIX below 20% reflects a healthy and relatively moderate-risk market. However, if the volatility index is extremely low, it may imply a bearish view of the market.

We tend to want to continue our winning streaks and keep assets as they continue upward, until they become “an outsized portion of the portfolio,” she said. When it’s time for a correction, “you’re holding a much heavier bag than you otherwise would have.” 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. Bankrate.com 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, except where prohibited by law for our mortgage, home equity and other home lending products.

When the VIX is high, it suggests that investors anticipate significant market changes, while a low VIX implies a stable, less volatile market outlook. The Chicago Board Options Exchange Volatility Index, or VIX, is an index that gauges the volatility investors expect in the U.S. stock market. Rather, it’s a leading indicator that measures the level of stock market volatility expected by investors. In this article, we’ll delve into what the VIX measures, how it’s calculated, and whether you should use it in your investment decisions. But to understand how the Volatility Index works, it’s helpful to have a basic understanding of options trading.