Following the popularity of the VIX, the CBOE now offers several other variants for measuring broad market volatility. Options and futures based on VIX products are available for trading on CBOE and CFE platforms, respectively. Many, or all, of the products featured on this page are from our advertising partners who compensate us when you take certain actions on our website or click to take an action on their website. 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. Thomas’ experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning.
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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. 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 is admiral markets trustworthy financial professionals are feeling about near-term market conditions.
Perhaps the most straightforward way to invest in the VIX is with exchange-traded funds (ETFs) and exchange-traded notes (ETNs) based on VIX futures. As exchange-traded products, you can buy and sell these securities like stocks, greatly simplifying your VIX investing strategy. 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.
This process involves computing various statistical numbers, like mean (average), variance, and finally, the standard deviation on the historical price data sets. 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. 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. Meanwhile, the IAI, which also has proven to be a leading indicator to the VIX, has shown some divergence.
Optimizing Options
A methodology was adopted that remains in effect and is also used for calculating various other variants of the volatility index. Given the differing factors driving the day-to-day action in each index, VIX and SPX are generally expected to maintain an inverse correlation with one another. That said, there are plenty of VIX derivatives and 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 index» or «fear gauge.» 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.
During the time period mentioned above, despite some concerns about the market, the overall IAI actually moved lower. While it’s rare, there are times when the normal relationship between VIX and S&P 500 changes or «decouple.» The chart below is an example of the S&P 500 and VIX climbing at the same time. This is common when institutions are worried about the market being overbought while other investors, particularly retail investors, are in a buying or selling frenzy.
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. Experts understand what the VIX is telling them through the lens of mean reversion. In finance, mean reversion is a key principle that suggests asset prices generally remain close to their long-term averages. If prices gain a great deal very quickly, or fall very far, very rapidly, the principle of mean reversion suggests they should snap back to their long-term average before long.
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. The CBOE Volatility Index (VIX) quantifies market expectations of volatility, providing investors and traders with insight into market sentiment. It helps market participants gauge potential risks and make informed trading decisions, such as whether to hedge or make directional trades. While the VIX itself is an index and cannot be traded, there are funds and notes investors and traders can participate in to gain exposure to the index.
- For example, the ProShares VIX Short-Term Futures ETF (VIXY) and the iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX) are two such offerings that track a certain VIX-variant index and take positions in linked futures contracts.
- Options and futures based on VIX products are available for trading on CBOE and CFE platforms, respectively.
- In other words, when the price of VIX is going up, the price of the S&P 500 is usually heading south.
- Options are derivative instruments whose price depends upon the probability of a particular stock’s current price moving enough to reach a particular level (called the strike price or exercise price).
- Because the S&P 500 includes so many large companies across several different market sectors, it is generally viewed as a good indication of how the U.S. stock market is performing overall.
- 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.
It tends to rise during times of market stress, making it an effective hedging tool for active traders. Though it can’t be invested in directly, you can purchase ETFs that track the VIX. When its level gets to 20 or higher, expectations are that volatility will be above normal over the coming weeks. There are a range of different securities based on the CBOE Volatility Index that provide investors with exposure to the VIX.
How Can Investors Use the VIX in Their Trading Strategies?
In other words, it should not be construed as a sign of an immediate market movement. «When the VIX is low, look out below!» tells us that the market is about to fall and that implied volatility is going to ramp up. When implied volatility is expected to rise, an optimal bearish options strategy is to be delta negative and vega positive (i.e., long puts would be the best strategy).
What is the Cboe Volatility Index (VIX)?
During this period, when the VIX reached the resistance level, it was considered high learn trading with online courses and classes 2021 and was a signal to purchase stocks—particularly those that reflect the S&P 500. Support bounces indicate market tops and warned of a potential downturn in the S&P 500. A mantra investors learn early on is, «When the VIX is high, it’s time to buy. When the VIX is low, look out below!» As an example, the figure below identifies various support and resistance areas from earlier in the history of the VIX. Notice how the VIX established a support area near the 19-point level early on and returned to it in previous years. Support and resistance areas have formed over time, even in the trending market from 2003 to 2005.
How Does the VIX Measure Market Volatility?
Pete Rathburn is a copy editor and fact-checker with expertise in economics and Alexander elder personal finance and over twenty years of experience in the classroom. 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. Get a custom financial plan and unlimited access to a Certified Financial Planner™ for just $49/month. For example, on Nov. 9, 2017, the VIX climbed 22% during the trading session on fears of delays in the tax reform plan. A quick analysis of the chart shows that the VIX bounces between a range of approximately the majority of the time but has outliers as low as 10 and as high as 85. It’s important to remember that these large market movers are like ocean liners—they need plenty of time and make waves when they change direction; you don’t want to be a small boat capsized when it does.
NerdWallet, Inc. does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments. It’s a contrarian indicator that helps investors look for tops, bottoms, and lulls in the trend. It allows traders to get an idea of large market players’ sentiments, which is helpful when preparing for trend changes and determining which option hedging strategy is best for their portfolio. Any estimates based on past performance do not a guarantee future performance, and prior to making any investment you should discuss your specific investment needs or seek advice from a qualified professional. 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.
«If the VIX is high, it’s time to buy» tells us that market participants are too bearish and IV has reached capacity. This means the market will likely turn bullish and implied volatility will likely move back toward the mean. The optimal option strategy is to be delta positive and vega negative (i.e., short puts would be the best strategy).