VIX CBOE Volatility Index Overview

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.

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. The VIX is calculated using average weighted https://www.investorynews.com/ real-time call and put prices across the S&P 500 index with an expiration date of between 23 and 37 days out. Because the S&P 500 index represents about 80% of the value of U.S. stocks, the VIX is used as a gauge of uncertainty in the overall U.S. stock market.

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. 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.

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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. When the VIX declines, investors are betting there will be smaller price moves up or down in the S&P 500, which implies calmer markets and less uncertainty. Following the popularity of the VIX, the CBOE now offers several other variants for measuring broad market volatility. Examples include 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). 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 VIX attempts to measure the magnitude of price movements of the S&P 500 (i.e., its volatility).

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. But to understand how the Volatility https://www.dowjonesanalysis.com/ Index works, it’s helpful to have a basic understanding of options trading. When you purchase options, you’re buying the right (but not the obligation) to buy or sell a stock at a specified date and price. In times of uncertainty, investors will pay a premium for what’s essentially a form of insurance.

1. Volatility is one of the primary factors that affect stock and index options’ prices and premiums.
2. Since option prices are available in the open market, they can be used to derive the volatility of the underlying security.
3. Our estimates are based on past market performance, and past performance is not a guarantee of future performance.
4. Just keep in mind that with investing, there’s no way to predict future stock market performance or time the market.
5. When you open and fund an eligible Charles Schwab account with a qualifying net deposit of cash or securities.

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Investors brace for volatility as large slug of Vix options expires Wednesday

Understanding how the VIX works and what it’s saying can help short-term traders tweak their portfolios and get a feel for where the market is headed. 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.

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 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. Since option prices are available in the open market, they can be used to derive the volatility of the underlying security. Such volatility, as implied by or inferred from market prices, is called forward-looking implied volatility (IV).

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. But VIX-tracking funds are typically used by day traders and tend to be extraordinarily risky. The VIX can help investors predict short-term performance, but the fluctuations shouldn’t concern long-term investors. 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 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.

Get stock recommendations, portfolio guidance, and more from The Motley Fool’s premium services. 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. Miranda Marquit has been covering personal finance, investing and business topics for almost 15 years.

However, the VIX can be traded through futures contracts and exchange traded funds (ETFs) and exchange traded notes (ETNs) that own these 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 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. It’s important to emphasize, however, that the VIX measures implied volatility, i.e., the level of volatility the market is anticipating.

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. 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.

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. 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.

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During winter 2013, a time of strong stock market performance, the VIX was at around 12. But in March 2020, as a global panic about the COVID-19 pandemic peaked, https://www.forex-world.net/ the index reached a record 82.69. You might consider shifting some of your portfolio to assets thought to be less risky, like bonds or money market funds.

The VIX Volatility Index

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. Volatility value, investors’ fear, 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. 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. Experts understand what the VIX is telling them through the lens of mean reversion.

The basics of VIX

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. 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.