What is the VIX Volatility Index and How Do You Trade it? IG International

At the time, the index only took into consideration the implied volatility of eight separate S&P 100 put and call options. After 2002, CBOE decided to expand the VIX to the S&P 500 to better capture the market sentiment. The most significant words in that description are expected and the next 30 days. The predictive nature of the VIX makes it a measure of implied volatility, not one that is based on historical data or statistical analysis. The time period of the prediction also narrows the outlook to the near term.

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When the VIX pushes above 15 but remains below 20 (blue-shaded area), this suggests that the long-term trend is still positive, but we are likely entering a pullback phase within that bullish trend. When we see a VIX push above 20 but not above 28.5 (yellow-shaded area), that would mean we are now in a high-volatility environment. The S&P 500 is probably in a clear pullback by now, and investors will be questioning whether it’s the beginning of a much deeper bearish phase. 1 We price our Volatility Index (VIX) contracts in a different way to the rest of our cash index markets. Rather than aiming to replicate the underlying index price, we follow the method used to derive our undated commodity prices. This means that there is a difference between our undated price and the underlying index price on these markets.

Delving Into the Details of the Volatility Index

The IAI is constructed by analyzing which topics generate the most reader interest at a given time and comparing that with actual events in the financial markets. Following the popularity of the VIX, the CBOE now offers several other variants for measuring broad market volatility. Products based on other market indexes include the Nasdaq-100 Volatility Index (VXN); the CBOE DJIA Volatility Index (VXD); and the CBOE Russell 2000 Volatility Index (RVX). The first method is based on historical volatility, using statistical calculations on previous prices over a specific time period. This process involves computing various statistical numbers, like mean (average), variance, and finally, the standard deviation on the historical price data sets.

What Is VIX and What Does it Measure?

When you trade the VIX, you aren’t trading an asset directly because there is no physical asset to buy or sell. Instead, with us, you can use CFDs to take a position on the movement of the VIX, as well as VIX futures and exchange traded funds (ETFs). The options that qualify for inclusion will be at the money so that they show the general market perception of which strike prices are going to be hit before expiry. This then indicates the wider market sentiment surrounding the direction of the market price. The VIX measures S&P 500 options, which are options contracts that take their prices from Standard & Poor’s 500 – a capitalisation weighted index of 500 stocks in the US.

In my personal opinion and from experience, based on the current geo-political environment I would say the VIX is fairly priced in the 20 point range (+/- 2). However, that mean will change as economic, market, and political conditions change. 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.

Active traders who employ their own trading strategies and advanced algorithms use VIX values to price the derivatives, which are based on high beta stocks. Beta represents how much a particular stock price can move with respect to the move in a broader market index. 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.

These include hedge funds, professional money managers, and individuals that make investments seeking to profit from market volatility. To facilitate and encourage these investments, the Cboe developed the VIX, which tracks market volatility on a real-time basis. Plus, investors and traders have no way of knowing which SPX calls and puts will be out-of-the-money on a future date. But SPX options expiry dates are known, along with the VIX Index formula for a given date, so that traders can estimate the price of the VIX Index. But the price of the VIX Index varies on a constantly changing portfolio of SPX options. These change on a minute-by-minute basis, so it can’t be bought by stock market investors or traders.

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. For example, on Nov. 9, 2017, the VIX climbed 22% during the trading session on fears of delays in the tax reform plan. Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Miranda Marquit has been covering personal finance, investing and business topics for almost 15 years.

1. Simply put, VIX measures the expectation of stock-market volatility as communicated by options prices.
2. Both standard and weekly Volatility Derivatives can be bought on either exchange.
3. The VIX is sometimes referred to as ‘the fear index’ because it negatively correlates closely with the S&P 500.
4. The VIX index measures volatility by tracking trading in S&P 500 options.
5. The options that qualify for inclusion will be at the money so that they show the general market perception of which strike prices are going to be hit before expiry.
6. The VIX quickly came falling back down and then went too far the other way and fell below 15.

The CBOE Volatility Index (VIX) is a measure of expected price fluctuations in the S&P 500 Index options over the next 30 days. The VIX, often referred to as the “fear index,” is calculated in real time by the Chicago Board Options Exchange (CBOE). 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.

Impact on your credit may vary, as credit scores are independently determined by credit bureaus based on a number of factors including the financial decisions you make with other financial services organizations. 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. Options and futures based on VIX products are available for trading on CBOE and CFE platforms, respectively. The last time we broke above 20 was heading into the October 2023 market low.

NerdWallet, Inc. is an independent publisher and comparison service, not an investment advisor. Its articles, interactive tools and other content are provided to you for free, as self-help tools and for informational purposes only. NerdWallet does not and cannot guarantee the accuracy or applicability of any information https://broker-review.org/fxdd/ in regard to your individual circumstances. Examples are hypothetical, and we encourage you to seek personalized advice from qualified professionals regarding specific investment issues. Our estimates are based on past market performance, and past performance is not a guarantee of future performance.

For instance, in the three months between Aug. 8, 2017, and Nov. 8, 2017, the VIX was up 19%—seemingly suggesting anxiety among market participants and implying that the S&P 500 should be on a downward trajectory. However, the S&P 500 was busy scaling all-time highs during that time frame. The investing information provided on this page is for educational purposes only. 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. 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. Only SPX options are considered whose expiry period lies within more than 23 days and less than 37 days.

The VIX options and futures can be used to both hedge a long portfolio or even used to take a position in the VIX. Hidden Volatility happens when volatility in both the equities and options premium contracts. Sometimes in the media they will refer to forex broker listing this as “Greed” or “Complacency”, however what is really happening is that the options premium is below and continuing to decline further than where the mean “should be”. This is subjective, but can certainly be seen and experienced at its extremes.

The VIX attempts to measure the magnitude of price movements of the S&P 500 (i.e., its volatility). The more dramatic the price swings are in the index, the higher the level of volatility, and vice versa. 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. Commodity and historical index data provided by Pinnacle Data Corporation. The information provided by StockCharts.com, Inc. is not investment advice.

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. When the VIX is up, it means that there are significant and rapid price fluctuations in the S&P 500. The VIX typically has a negative correlation with the S&P 500, so in periods of market stress, the VIX increases.

VIX anticipates moves in the S&P 500 specifically over the next 30 days. That is enough time for investors to make decisions and act on them, but close enough to add a note of urgency if significant change is forecast. Investors, analysts, and portfolio managers look to the Cboe Volatility Index as a way to measure market stress before they make decisions. When VIX returns are higher, market participants are more likely to pursue investment strategies with lower risk. Although the VIX revealed high levels of investor anxiety, the Investopedia Anxiety Index (IAI) remained neutral.

SPX Options expire on the third Friday of each month, while the Weekly SPX Options expire on the remaining Fridays. Often alluded to as the ‘fear gauge’ on Bloomberg TV, CNBC, and CNN/Money, the VIX is regularly mentioned in the media and discussed among financial professionals. Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more – straight to your e-mail. Meanwhile, the IAI, which also has proven to be a leading indicator to the VIX, has shown some divergence.

Instead, investors can take a position in VIX through futures or options contracts, or through VIX-based exchange traded products (ETPs). Simply put, VIX measures the expectation of stock-market volatility as communicated by options prices. Rather than measuring “realized” or historical volatility, VIX projects “implied” or expected volatility–specifically 30 days in the future–by measuring changes in the prices of options on the S&P 500. 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 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.

Market data provided is at least 10-minutes delayed and hosted by Barchart Solutions. The strike range of an SOQ calculation also differs from that of the VIX Index calculation at other times. The CBOE Volatility Index is calculated using standard SPX options and weekly SPX options with Friday expirations.

We believe everyone should be able to make financial decisions with confidence. As an investor, if you see the VIX rising it could be a sign of volatility ahead. You might consider shifting some of your portfolio to assets thought to be less risky, like bonds or money market funds. Alternatively, you could adjust your asset allocation to cash in recent gains and set aside funds during a down market.

ETNs that track volatility include the iPath S&P 500 VIX Short-Term Futures (VXX) and the iPath Series B S&P 500 VIX Mid-Term Futures (VXZ). If the VIX heads higher than 20, then fear is starting to enter into the market and it is forecasting a higher risk environment. If it goes too high, then everyone is singing the “chicken little” song.

ETNs in particular can be less liquid and more difficult to trade as well as may carry higher fees. 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.

Now, if the VIX pushes above the 28.5 level (red-shaded area), then the S&P 500 has essentially entered a confirmed bearish phase. This is a level I learned about from Tim Hayes at Ned Davis Research, based on research they had conducted on a deep history of the VIX. November 2021 just before the 2022 market top, and February 2020 at the beginning of the COVID era. A VIX above 28.5 is actually fairly uncommon, and I’ve learned to treat extremes in the VIX as a major red flag and a good reason to rotate to risk-off positions. The VIX is sometimes referred to as ‘the fear index’ because it negatively correlates closely with the S&P 500. Conversely, more certain times with less macroeconomic volatility mean a ‘flatter’ VIX with lower values.

But for those who are more inclined to trade and speculate, ETFs that track the VIX can be a useful tool. When uncertainty and fear hits the market, stocks generally fall, and your portfolio could take a hit. But having a small amount of money invested in an ETF that tracks the VIX can help dampen the blow. It should be noted that these are rough guidelines ⏤ unexpected events can throw a wrench into markets and a low VIX level today could be followed by a period of extreme volatility if circumstances change. Although the prices of Volatility Derivatives are linked to SPX options, individually, their valuations expire at various points along the term structure. Therefore, these reflect constantly changing portfolios of SPX options.

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 formula used by Cboe to calculate the price of VIX is rather complex, and the price of VIX is updated live during trading hours every 15 seconds. To spare you the math headache involved with calculating the price, let’s look instead at the data used to calculate it. The VIX index is specifically measuring expected volatility for another index, the S&P 500.

It was the first benchmark to quantify market expectations of volatility. But the index is forward-looking, which means that it only shows the implied volatility of the S&P 500 (SPX), also known as the US 500 on our platform, for the next 30 days. We want to clarify that IG International does not have an official Line account at this time. We have not established any official presence on Line messaging platform.

A call option would give you the right to buy the S&P 500 at a specific price, while a put option would give you the right to sell the S&P 500 at a specific price. The price that you choose to buy or sell the underlying market is known as the strike price. The VIX was created by the Cboe Global Markets (Cboe), originally known as the Chicago Board Options Exchange, which bills itself as “the largest U.S. options exchange and creator of listed options.” It is sometimes easier to think of trading VIX options opposite of how you would trade the options in the S&P. If you think the S&P is heading sharply lower then purchasing VIX call options would benefit. If you think the S&P is heading sharply higher then purchasing VIX put options would benefit.

Notice how there is often a strong inverse relationship between the two? While there have occasionally been spikes in the correlation to around the zero level (basically, no relationship between the two data series), the correlation has usually remained in the -0.7 to -1.0 range. The information in this site does not contain (and should not be construed as containing) investment advice or an investment recommendation, or an offer of or solicitation for transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. VXX is a type of product, specifically an Exchange Traded Note (ETN), used to trade volatility on the S&P 500, while VIX is an index measuring volatility. If you don’t feel confident enough to start trading on live markets, you might want to consider opening a demo CFD trading account.

For our understanding of the model, the options are pricing that the S&P 500 index (the largest 500 companies) will be in a range of +/- 50% over the year, 68% of the time. The VIX quickly came falling back down and then went too far https://forexbroker-listing.com/ the other way and fell below 15. Again, during the crisis the VIX would have us believe that all is well and that the S&P 500 index has a very low probability of making any radical moves, again the VIX was wrong and it moved back up.

The S&P 500 Index and other stock market indices are made up of a portfolio of stocks. Therefore the price of the index is based on the return percentage of each constituent. In 2014, the VIX was enhanced once again to include a series of SPX Weeklys. A third of all SPX options traded are Weeklys, at close to 350k contracts a day. This update ensured a new level of precision in matching the 30-day timeframe the VIX represents. The VIX is typically used to measure short-term investor sentiment, but many also use the index as a foundation for active investing strategies.

The position you decide to take will depend on your expectation of volatility levels. Traders who go long on the VIX are those who believe that volatility is going to increase and so the VIX will rise. Going long on the VIX is a popular position in times of financial instability, when there is a lot of stress and uncertainty in the market. The VIX is calculated in real time using the live prices of S&P 500 options – this includes standard CBOE SPX options, which expire on the third Friday of every month, and weekly CBOE SPX options that expire every Friday. To be considered for the VIX index, an option must have an expiry date between 23 and 37 days. I have a saying known as “Hidden Volatility”; this is when the market premium [options premium] contracts as the equity markets start to consolidate.

Although you believe it has long-term prospects, you want to reduce your exposure to some short-term volatility. You decide to open a position to buy the VIX with the expectation that volatility is going to increase. Failing to do the proper preparation and taking a prudent approach to investing can have a more detrimental result on your personal bottom line than making a mathematical error in your VIX calculation.