What Is The VIX Volatility Index?

Get a custom financial plan and unlimited access to a Certified Financial Planner™ for just $49/month. 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.

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Such volatility, as implied by or inferred from market prices, is called forward-looking implied volatility (IV). 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. 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. 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.

What Is the CBOE Volatility Index (VIX)?

Beta represents how much a particular stock price can move with respect to the move in a broader market index. All such qualifying options should have valid nonzero bid and ask prices that represent the market perception of which options’ strike prices will be hit by the underlying stocks during the remaining time to expiry. 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. Before purchasing a security tied to an index like the VIX, it’s important to understand all of your options so that you can make educated decisions about your investment choices. If you’re interested in investing in a VIX ETF/ETN, we recommend that you speak with a financial professional first to make sure your investment strategy fits your needs.

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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. 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 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 index is specifically measuring expected volatility for another index, the S&P 500. True to its name, the S&P 500 index is composed of 500 of the largest publicly traded companies in the U.S. 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. 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. Instead, investors can take a position in VIX through futures or options contracts, or through VIX-based exchange-traded products (ETPs).

Some exchange-traded securities let you speculate on implied volatility up to six months in the future, such as the iPath S&P 500 VIX Mid-Term Futures ETN (VXZ), which invests in VIX futures with four- to seven-month maturities. 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.

Alternatively, you could adjust your asset allocation to cash in recent gains and set aside funds during a down market. Before investing in any VIX exchange-traded products, you should understand some of the issues that can come with them. Certain VIX-based ETNs and ETFs have less liquidity than you’d expect from more familiar exchange traded securities. ETNs in particular can be less liquid and more 8 ways to grow your money fast difficult to trade as well as may carry higher fees. 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.

Our partners cannot pay us to guarantee favorable reviews of their products or services. Following the popularity of the VIX, the CBOE now offers several other variants for measuring broad market volatility. The VIX was the first benchmark index introduced by CCOE to measure the market’s expectation of future volatility. 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.

The VIX has paved the way for using volatility as a tradable asset, albeit through derivative products. CBOE launched the first VIX-based exchange-traded futures contract in March 2004, followed by the launch of VIX options in February 2006. During its origin in 1993, VIX was calculated as a weighted measure of the implied volatility of eight S&P 100 at-the-money put and call options, when the derivatives market had limited activity and was in its growing stages. Since option prices are available in the open market, they can be used to derive the volatility of the underlying security.

The small peak around the beginning of August already perfectly captured the Aug. 5 spike that rattled investors. And right now is when volatility tends to pick up and trend higher into November. Investors might assume that a low VIX means markets are stable and not in need of hedging. Thinking back to the Monday market meltdown with hindsight, the right play was to sell the VIX by midday — by either shorting or covering prior long bets. Generally speaking, if the VIX index is at 12 or lower, the market is considered to be in a period of low volatility.

1. Just keep in mind that with investing, there’s no way to predict future stock market performance or time the market.
2. In many cases, large institutional investors will use options trading to hedge their current positions.
3. When you see the VIX above 30, that’s sometimes viewed as an indication that markets are very unsettled.

If many of the large investment firms are anticipating the same thing, there is usually a spike in options trading for the S&P 500. The VIX index uses the bid/ask prices of options trading for the S&P 500 index in order to gauge investor sentiment for the larger financial market. 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.

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. 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. Examples include Best forex indicator the CBOE Short-Term Volatility Index (VIX9D), which reflects the nine-day expected volatility of the S&P 500 Index; the CBOE S&P Month Volatility Index (VIX3M); and the CBOE S&P Month Volatility Index (VIX6M).

NerdWallet, Inc. is an independent hotforex is it a scam review 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 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. The second method, which the VIX uses, involves inferring its value as implied by options prices.

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. Market professionals rely on a wide variety of data sources and tools to stay on top of the market. The VIX is one the main indicators for understanding when the market is possibly headed for a big move up or down or when it may be ready to quiet down after a period of volatility. In the last month, major stock indexes like the S&P 500 have been pulled downward as a result of disappointing earnings reports from big tech stocks. If you’ve been following financial news, you may have heard the word “volatility” being thrown around a lot — and you may have heard a reference to a volatility measurement called the VIX.