What is the VIX and How to Use It

If you miss the best 30 days – just an average of 1 day per year – your return would be 83% lower. And 78% of the best days occurred in bear markets when VIX reading are higher. 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. Investing involves market risk, including possible loss of principal, and there is no guarantee that investment objectives will be achieved.

If you have an investing time horizon in the decades you shouldn’t care about volatility. The market may be unstable but investors should be wary of missing out on these periods. Over the last 30 years if you miss the S&P 500’s 10 best days your return would be cut in half.

The index was created by the Chicago Board Options Exchange (aka Cboe, pronounced see-boh), which is a trading exchange like the New York Stock Exchange that’s focused on options contracts. There’s no crystal ball for the stock market, but there are indexes that help investors gauge expected risk. Forex free margin It can offer a sense of future volatility, or how bumpy things could get, for the US stock market over the next 30 days. Learn how the VIX works, how it’s calculated, and what a high or low VIX could mean for your investments. Understanding the VIX can help investors stay more grounded and less reactive during a market downturn.

Q. How do VIX options work?

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Applying VIX Volatility to the Broader Market

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. As a rule of thumb, VIX values greater than 30 are generally linked to significant volatility resulting from increased uncertainty, risk, and investors’ fear. VIX values below 20 generally correspond to stable, stress-free periods in the markets.

The VIX Index measures stock market volatility, often called the ‘fear gauge,’ helping investors assess market risk and sentiment. Rather than tracking past market performance, the VIX provides a snapshot of expected future volatility. It does this by analyzing the prices of S&P 500 index options—contracts that allow investors to buy or sell the index at a predetermined price on or before a future date.

Instead, investors can take a position in VIX through futures or options contracts, or through VIX-based exchange-traded products (ETPs). The index is more commonly known by its ticker symbol and is often referred to simply as “the VIX.” It was created by the CBOE Options Exchange and is maintained by CBOE Global Markets. It is an important index in the world of trading and investment because it provides a quantifiable measure of market risk and investors’ sentiments. 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.

Investment tools & resources

If the VIX is a reasonable predictor of volatility over the next month than a high VIX reading may mean the market has more of a chance in falling during that period. The only thing an investor could possibly do with this information is rotate into defensive assets. In theory the same investor that was relying on VIX as a trigger for adjusting a portfolio would rotate into growth assets if the VIX reading was low. There are countless studies of the predictive power of the VIX. The consensus is that it is a reasonable but imperfect marker of future volatility. With that context the question is if following the VIX should inform investing decisions.

As the VIX is the most widely watched measure of broad market volatility, it has a substantial impact on option prices or premiums. 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 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.

• Volatility is one of the primary factors that affect stock and index options’ prices and premiums.
• The problem with relying on crowds is that the crowd can become collectively overly optimistic or pessimistic when it comes to investing or any emotionally driven pursuit.
• VIX is certainly an example of data that should be ignored.
• But it’s just one tool in making smart investment decisions for your financial future.

Practical uses for the volatility index

This process involves computing various statistical numbers, like mean (average), variance, and the standard deviation on the historical price data sets. Many investors mistakenly believe that the VIX can predict which way the market will move. This is perhaps the most pervasive misconception about the index.

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. 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. 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 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. It’s often called “the fear gauge,” since higher volatility is linked with higher uncertainty among investors.

The final figure is expressed as a percentage that reflects the expected 30-day volatility of the S&P 500. During times of market volatility, it can be especially helpful to get expert advice. Connect with a Thrivent financial advisor today to discuss how they can help you stay focused on your long-term goals, no matter what the market brings. VIX options are contracts that give investors the right, but not the obligation, to trade the VIX futures at a predetermined price before expiration.

How to use the VIX to make better investment decisions

• This process involves computing various statistical numbers, like mean (average), variance, and the standard deviation on the historical price data sets.
• The more dramatic the price swings in the index, the higher the level of volatility, and vice versa.
• 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.
• During times of market volatility, it can be especially helpful to get expert advice.
• A high VIX reading doesn’t necessarily mean stocks will fall, just as a low reading doesn’t guarantee market stability.
• Morgan Wealth Plan can help focus your efforts on achieving your financial goals.

Understanding the VIX can provide valuable insight into market expectations and investor sentiment, helping you to manage investment risk and make more informed decisions. A VIX of above 20 could be considered high, but it can potentially go much higher. When the VIX rises to such high values, that means investors expect greater market volatility in the near future. 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.

Understanding How the VIX Index Functions

Often called Wall Street’s “fear gauge,” it tries to capture investor nerves and uncertainty by crunching the numbers from S&P 500 options prices. While it’s not a crystal ball, the VIX gives investors and market professionals data for making well-informed decisions. But like any metric, it should be considered as part of a broader investment strategy. VIX futures are derivatives based on the VIX Index, allowing investors to trade on future volatility expectations. 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.

What is the Cboe Volatility Index (VIX)?

As the derivatives markets matured, 10 years later, in 2003, the CBOE teamed up with Goldman Sachs and updated the methodology to calculate the VIX differently. It would be foolish for an investor to adjust their portfolio based on the VIX. We can be whipped into a frenzy by headlines like the ones we’ve experienced in the past few weeks. The VIX reading is both a manifestation of this frenzy and a driver as the VIX is often used as proof that markets are unstable. The wisdom of crowds is supposed to provide better insights into what will happen than relying on a few experts. The problem with relying on crowds is that the crowd can become collectively overly optimistic or pessimistic when it comes to investing or any emotionally driven pursuit.

Insurance products are made available through Chase Insurance Agency, Inc. (CIA), a licensed insurance agency, doing business as Chase Insurance Agency Services, Inc. in Florida. Certain custody and other services are provided by JPMorgan Chase Bank, N.A. JPMS, CIA and JPMCB are affiliated companies under the common control of JPMorgan Chase & Co. Morgan Securities LLC (JPMS), a registered broker-dealer and investment adviser, member FINRA and SIPC. Based on the Federal Reserve of St. Louis data, a value of less than 20 could be considered relatively low, meaning that investors don’t tend to expect large future price swings.

The second method, which the VIX uses, involves inferring its value as implied by options prices. 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. The only possible use of the VIX is as a short-term market timing measure. Due to transaction costs, taxes and the fact that even informed guesses on short-term market movements are mostly wrong makes this a fool’s errand. The VIX is derived from the prices of the S&P 500 index options.