Cboe Volatility Index (VIX)

What Is the VIX and How Does It Measure Volatility?

In finance, the term VIX is short for the Chicago Board of Exchange's Volatility Index. This index measures S&P 500 index options and is used as an overall benchmark for volatility in the stock market. The higher the index level, the choppier the trading environment, which makes its other nickname pretty apt: the fear index.
It's important to point out that the VIX measures implied, or theoretical, volatility. It measures the expectation of future volatility based on a snapshot of the previous 30 days' worth of trading activity.

What Do the VIX Numbers Mean?

• A VIX level above 20 is typically considered "high."
• A VIX below 12 is typically considered "low."
• In the middle of between 12 and 20 is considered "normal."

When there is increased activity on put options, and that means that investors are selling more puts, the VIX registers a high number. Investing in a put option is like betting that the price of a stock will go down before the put contract expires because puts give investors the right to sell shares of a stock on a specific date at a specific price.
These are bearish investments, ones that can take advantage of emotions like fear. There is a colloquialism on Wall Street that does "When the VIX is high, now is the ideal time to buy" because the general belief is that volatility might have reached a peak, or a defining moment.
When the VIX falls, that means that investors are buying more call options. Investing in a call is like betting that the price of a stock will go up before the call contract expires. In other words, a falling reading on the VIX indicates that the overall sentiment in the stock market is more optimistic, or bullish.Although the VIX isn't expressed as a percentage, it ought to be understood as one. A VIX of 22 translates to implied volatility of 22% on the SPX. This means that the index has a 66.7% probability (that being one standard deviation, statistically speaking) of trading inside a range 22% higher than — or lower than — its current level inside the next 12 months.

How Is the VIX Calculated? What Is the VIX Formula?

In a nutshell, the VIX is calculated by the Chicago Board of Options Exchange utilizing market prices of S&P 500 put and call options with an average expiration of 30 days. It uses standard weekly SPX options and those with Friday expirations, however unlike the S&P 500 index, which contains specific stocks, the VIX is made up of a continually changing portfolio of SPX options. The Chicago Board of Options website goes into more detail about its methodology and selection criteria.

How Do I Interpret the VIX?

There are numerous ways of interpretting the VIX, however it's important to note that it's a theoretical measure and not a precious stone ball. Even the sentiment it tracks, fear, isn't itself measured by hard data, for example, the latest Consumer Price Index. Rather, the VIX uses options prices to estimate how the market will act over a future timeframe.
It's additionally important to understand how much emotion can drive the stock market. For example, during earnings season, a company's stock might report strong growth yet see shares plummet, because the company didn't meet analyst expectations. Such a large amount what goes on in the market can be summed up by feelings, like greed, as investors spot appreciation potential and place buy orders, which drive prices higher overall. Fear is evidenced when investors try to protect their investments by selling their shares, driving prices lower.
Best case scenario, fear-driven selling can send the market into a tailspin and lead to emotions like panic, which can result in capitulation.
However, the VIX isn't designed to cause panic. It is simply a gauge of volatility. In fact, some investors, especially traders, view the increased turbulence as a signal to buy, so they make a profit either through speculation or hedging and hence capitalize on the situation.

Might the VIX at any point Go Above 100?

Theoretically speaking, the VIX can top 100, despite the fact that it has never reached that point since data collection began in 1990.
The two highest points the VIX has ever reached were the following:

1. On October 24, 2008, at the height of the Financial Crisis, which stemmed from the global implosion of mortgage-backed securities, the VIX reached 89.53.
2. On March 16, 2020, during the beginning of the COVID-19 pandemic, the VIX recorded a high of 82.69.

Analysts additionally believe that had data collection begun during the 1980s, the VIX would have topped 100 during the Black Stock Market Crash, on Monday, October 19, 1987.
This chart from FRED, the Federal Reserve's data center, details the VIX from 1990 to 2022. Shaded areas illustrate periods of recession:

How Do I Trade the VIX? Could You at any point Buy Options on the VIX?

Investors can't invest directly in the VIX, yet they can invest in derivatives that track the VIX, for example, VIX-based exchange-traded funds (ETFs), like ProShares VIX Mid-Term Futures ETF (VIXM), and exchange-traded notes, like the iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX) and the iPath Series B S&P 500 VIX Mid-Term Futures ETN (VXZ).

What Is the VIX at Today?

To view the VIX's current reading, visit the webpage maintained by the Chicago Board of Options Exchange; it is updated daily.

What Are the VIX's Current Volatility Predictions?

The stock market has been in choppy waters for the vast majority of 2022. Tech stocks, the Nasdaq, and stocks with high P/E ratios have taken a beating as investors worry about continued inflation, the Russia/Ukraine war's effect on energy prices, the aggressive pace of interest rate hikes from the Federal Reserve, and China's extreme "zero-COVID" policies. These things are causing the tempest mists to gather around the possibility of recession.

Highlights

• The Cboe Volatility Index, or VIX, is a real-time market index representing the market's expectations for volatility over the approaching 30 days.
• The VIX generally rises when stocks fall, and declines when stocks rise.
• Traders can likewise trade the VIX utilizing a variety of options and exchange-traded products, or they can use VIX values to price derivatives.
• Investors use the VIX to measure the level of risk, fear, or stress in the market when pursuing investment choices.

FAQ

How Could an Investor Trade the VIX?

Like all indices, the VIX can't be bought directly. However, the VIX can be traded through futures contracts and exchange traded funds (ETFs) and exchange traded notes (ETNs) that own these futures contracts.

What Is a Normal Value for the VIX?

The long-run average of the VIX has been around 21. High levels of the VIX (normally when it is above 30) can point to increased volatility and fear in the market, often associated with a bear market.

Does the Level of the VIX Affect Option Premiums and Prices?

Yes, it does. Volatility is one of the primary factors that affect stock and index options' prices and premiums. As the VIX is the most widely watched measure of broad market volatility, it significantly affects 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.

What Does the VIX Tell Us?

The Cboe Volatility Index (VIX) signals the level of fear or stress in the stock market — involving the S&P 500 index as a proxy for the broad market — and hence is widely known as the "Fear Index." The higher the VIX, the greater the level of fear and uncertainty in the market, with levels above 30 showing tremendous uncertainty.

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

Downside risk can be adequately hedged by buying put options, the price of which depend on market volatility. Astute investors tend to buy options when the VIX is relatively low and put premiums are cheap. Such protective puts will generally get expensive when the market is sliding; therefore, like insurance, it's best to buy them when the need for such protection isn't self-evident (i.e., when investors perceive the risk of market downside to be low).