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. Downside risk can be adequately hedged by buying put options, the price of which depends on market volatility. Astute investors tend to buy options when the VIX is relatively low and put premiums are cheap. One of the most popular and accessible of these is the ProShares VIX Short-Term Futures ETF (VIXY), which is based on VIX futures contracts with a 30-day maturity.
Volatility S&P 500 Index
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. A methodology was adopted that remains in effect and is also used for calculating various other variants of the volatility index. It’s important to note here that while volatility can have negative connotations, like greater risk, more stress, deeper uncertainty or bigger market declines, volatility itself is a neutral term. Greater volatility means that an index or security is seeing bigger price changes—higher or lower—over shorter periods of time. The higher the VIX, the greater the level of fear and uncertainty in the market, with levels above 30 indicating tremendous uncertainty. 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.
Wall Street’s famous ‘fear gauge’ isn’t what it used to be as funds shake off VIX spike
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. However, the VIX can be traded through futures contracts, exchange-traded funds (ETFs), and exchange-traded notes (ETNs) that own these futures contracts.
Such VIX-linked instruments allow pure volatility exposure and have created a new asset class. 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. The CBOE Volatility Index—also known as avoiding cash account trading violations the VIX—is a primary gauge of stock market volatility.
How Can an Investor Trade the VIX?
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. The CBOE Volatility Index (VIX) is a real-time index that represents the market’s expectations for the relative strength of near-term price changes of the S&P 500 Index (SPX). Because it is derived from the prices of check if svsfx is scam or safe SPX index options with near-term expiration dates, it generates a 30-day forward projection of volatility. Volatility, or how fast prices change, is often seen as a way to gauge market sentiment, and in particular the degree of fear among market participants.
- Alternatively, you could adjust your asset allocation to cash in recent gains and set aside funds during a down market.
- As an investor, if you see the VIX rising it could be a sign of volatility ahead.
- And historical price action surrounding August shocks suggests that stocks are not in the clear just yet.
- So, if the big firms on Wall Street are anticipating an upswing or downswing in the broader market, they may try to hedge against that volatility by placing options trades.
Market professionals refer to this as “implied volatility”—implied because the VIX tracks the options market, where traders make bets about the future performance of different securities and market indices, such as 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. Large institutional investors hedge their portfolios using S&P 500 options to position themselves as winners whether the market goes up or down, and the VIX index follows these trades to gauge market volatility.
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). The bank reminds investors that in prior years, markets didn’t immediately recover from August market shocks. Then S&P downgraded US debt in August 2011, and China surprised the world in 2015 by devaluing its currency, the yuan. The chart above tracks the average VIX level across the calendar year, using data from 1990 to 2023.
When investors trade options, they are essentially placing bets on where they think the price of a specific security will go. In many cases, large institutional investors will use options trading to hedge their current positions. So, if the big firms on Wall Street are anticipating an upswing or downswing in the broader market, they may try to hedge against that volatility by placing options trades.
The VIX measures the market’s expectation of S&P 500 volatility over the next 30 days as calculated from options on the benchmark. It doesn’t account for actual fear but rather reflects the market’s best estimate of future volatility, which often coincides with market fear or panic. 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. 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.
VIX vs. S&P 500 Price
Options and futures based on VIX products are available for trading on CBOE and CFE platforms, respectively. Since the possibility of such price moves happening within the given time frame is represented by the volatility factor, various option pricing methods (like the Black-Scholes model) include volatility as an integral input parameter. The team also noted that from a historical perspective, the VIX tends to rise from August through October, which can be bearish for stocks. But almost as soon as the selling was over that morning, the eye-popping recovery began, which could be why there’s not even a compelling agreed-upon name for the event. By midday in the US on that fateful Monday, the VIX had already fallen to 30 — its biggest intraday crash on record.
But this roller-coaster ride of volatility highlights some critical misconceptions about the VIX. And historical price action surrounding August shocks suggests that stocks are not in the clear just yet. Experts understand what the VIX is telling them through the lens of microsoft stock reacts to ‘head mean reversion.
Find more episodes on our video hub or watch on your preferred streaming service. “August fragility leads fall volatility (and it’s not priced in),” the team wrote in a note to investors. Thursday marks the one-month anniversary of the Aug. 5 “yen shock” — a mini-market panic that quickly spread throughout global markets after beginning in Japan the Monday following the July jobs report. Miranda Marquit has been covering personal finance, investing and business topics for almost 15 years. She has contributed to numerous outlets, including NPR, Marketwatch, U.S. News & World Report and HuffPost. Miranda is completing her MBA and lives in Idaho, where she enjoys spending time with her son playing board games, travel and the outdoors.
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). Volatility values, investors’ fears, and VIX values all move up when the market is falling. The reverse is true when the market advances—the index values, fear, and volatility decline. 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. 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.
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