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CBOE Volatility Index VIX: What Does It Measure in Investing?

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Meanwhile, the IAI, which also has proven to be a leading indicator to the VIX, has shown some divergence. During the time period mentioned above, despite some concerns about the market, the overall IAI actually moved lower. 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.

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. Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018.

  1. The VIX, often referred to as the “fear index,” is calculated in real time by the Chicago Board Options Exchange (CBOE).
  2. Miranda is completing her MBA and lives in Idaho, where she enjoys spending time with her son playing board games, travel and the outdoors.
  3. 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.
  4. 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.
  5. 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.
  6. In contrast, if stock prices are rising and no dramatic changes seem probable, VIX tends to fall or remain steady at the lower end of its scale.

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. 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. 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.

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.

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. 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.

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.

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. The VIX is considered a reflection of investor sentiment, but one must remember that it is supposed to be a leading indicator. In other words, it should not be construed as a sign of an immediate market movement. In the last month, major is oanda legit 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. Volatility value, investors’ fear, and VIX values all move up when the market is falling.

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). 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).

Long/Short Volatility

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. 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. Since VIX reaches its highest levels when the stock market is most unsettled, the media tend to refer to VIX as a fear gauge. In the sense that VIX is a measure of sentiment—of worry in particular—the description is on the mark.

The basics of VIX

The reverse is true when the market advances—the index values, fear, and volatility decline. 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. 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. Options and futures based on VIX products are available for trading on CBOE and CFE platforms, respectively.

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. Over long periods, index options have tended to price in slightly more uncertainty than the market ultimately realizes. Specifically, the expected volatility implied by SPX option vintage fx prices tends to trade at a premium relative to subsequent realized volatility in the S&P 500 Index. Market participants have used VIX futures and options to capitalize on this general difference between expected (implied) and realized (actual) volatility, and other types of volatility arbitrage strategies. 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.

What is VIX?

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 ndax review of mean reversion suggests they should snap back to their long-term average before long. For example, on Nov. 9, 2017, the VIX climbed 22% during the trading session on fears of delays in the tax reform plan.

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 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. Alternatively, VIX options may provide similar means to position a portfolio for potential increases or decreases in anticipated volatility.

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