First introduced by the Chicago Board Options Exchange (Cboe) in 1993, the initial version of the VIX reflected a rolling 30-day calculation of at-the-money implied volatility (IV) on S&P 100 Index (OEX) options. This calculation is no longer widely used or tracked, but the “old VIX” is still available under the ticker symbol VXO. This commentary offers generalized research, not personalized investment advice.
Founded in 1993, The Motley Fool is a financial services company dedicated to making the world smarter, happier, and richer. Many StatPro clients use the VIX and other volatility-based indices as part of a multi-factor approach to risk management. These clients use our Revolution Risk modules to stress volatility indices like the VIX to observe how other market drivers would respond, and then apply those stresses to their own portfolios. Stress testing using the VIX helps market participants estimate the impact of dynamic shocks to volatility on their portfolios. That said, there are plenty of VIX derivatives and VIX-linked exchange-traded products available for those looking to add long or short volatility exposure to their portfolios.
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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). In addition to its use as a market indicator, the VIX can provide insights into institutional sentiment and the actions of hycm review large market players. Institutions often use options to hedge their portfolios against potential market downturns. By monitoring the VIX, investors can gauge whether institutions are increasing their hedging activities, indicating a more cautious outlook on the market.
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. 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. Beta represents how much a particular stock price can move with respect to the move in a broader market index. The VIX has paved the way for using volatility as a tradable asset, albeit through derivative products.
The real-time VIX values quoted in the financial media (aka the “spot” or “cash” VIX) should be regarded as statistics. The reality is the VIX has no publicly listed shares and cannot be traded directly in the same way as a company’s stock. 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.
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When the VIX is high, it may be an opportune time to consider buying stocks, as market fear and uncertainty often lead to attractive valuations. Conversely, when the VIX is low, it may be a sign to exercise caution and consider taking profits or implementing risk management strategies. A higher nonfarm payrolls forecast VIX value indicates higher expected volatility and uncertainty in the market, implying higher levels of fear or anxiety among investors.
What Is the VIX? This ‘Fear Index’ Is Used for Active Investing
- It is important to note that trading the VIX and volatility products can be complex and involves risks.
- The VIX attempts to measure the magnitude of price movements of the S&P 500 (i.e., its volatility).
- When the stock market declines, the VIX tends to increase, reflecting investor fear and uncertainty.
- When the VIX is high, indicating increased volatility, traders may consider selling options to generate income.
- The VIX around 9 is vulnerable to complacency, and at 40 the market could be bottoming.
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. Traders can employ different strategies using the VIX to take advantage of market volatility. When the VIX is high, indicating increased volatility, traders may consider selling options to generate income. Conversely, when the VIX is low, traders may look for opportunities to buy options as a way to hedge their positions or speculate on potential market moves. The VIX can be a useful tool for investors when developing their investment strategies.
-1x Short VIX Futures ETF (SVIX)
The VIX is merely a suggestion, and it’s been proven to be wrong about the future direction of markets nearly as often as it’s been right. That’s why most everyday investors are best served by regularly investing in diversified, low-cost index funds and letting dollar-cost averaging smooth out any pricing swings over the long term. When the VIX is high, it suggests that investors anticipate increased market volatility and fear. Conversely, when the VIX is low, it indicates a more complacent market environment.
In 2018, back when it offered full inverse exposure (1x), the ETF lost more than 90% of its value in a single day. ProShares has since reduced the leverage to 0.5x to reduce the risk of a repeat event. The appeal here lies in how volatility tends to revert to the mean, and how contango erodes the value of VIX futures.
This inverse ETF is best used as a tactical play, such as buying it after a volatility spike, when the VIX is expected to revert lower. It’s not a long-term core holding but can work as a short-term position in a falling volatility environment. Instead of tracking front-month contracts, it follows the S&P 500 VIX Mid-Term Futures Index, which maintains exposure to VIX futures with a weighted average of five months to expiration. As of May 9, 2025, the ETF was holding a ladder of August, September, October, and November 2025 VIX contracts.
On the other hand, VIX values that are lower than 20 can signal increased stability in the markets. As such, many analysts and market watchers track the VIX as a contemporaneous indicator of investor sentiment, and it’s often referred to casually as the “fear gauge.” The VIX is typically used to measure short-term investor sentiment, but many also use the index as a foundation for active investing strategies. 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. The Cboe Volatility Index (VIX), otherwise known as “the fear index,” closed above 40 for the first nfp in trading time since 2020 in early April when President Trump sent the stock market into a tailspin with his “Liberation Day” tariffs. Then, starting on April 9, when Trump paused most of those tariffs for 90 days, the VIX began a rapid descent.
On the other hand, a lower VIX value suggests lower expected volatility, indicating a more stable and calm market. Did you know that there’s a way to measure the expected volatility of the stock market? It is one of the most recognized indicators of expected market volatility and is widely followed as a daily market indicator.
- The more dramatic the price swings are in the index, the higher the level of volatility, and vice versa.
- 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.
- Investors can hedge against downside risk by purchasing put options, which are influenced by market volatility.
It is for informational purposes only and does not constitute a complete description of our investment services or performance. Nothing in this commentary should be interpreted to state or imply that past results are an indication of future investment returns. Be sure to consult with an investment & tax professional before implementing any investment strategy. However, the VIX can be traded through futures contracts, exchange-traded funds (ETFs), and exchange-traded notes (ETNs) that own these futures contracts.
The VIX reflects the market’s expectations for near-term volatility, but its value goes far beyond periods of panic. It offers insight into how investors are pricing risk, and what that implies for future market behavior. While the VIX itself cannot be directly traded, investors have various options to gain exposure to volatility through derivative products linked to the VIX. The Chicago Board Options Exchange (CBOE) introduced VIX futures and options, allowing investors to trade on expected changes in volatility. Additionally, exchange-traded funds (ETFs) and exchange-traded notes (ETNs) linked to the VIX provide another avenue for investors to access volatility trading strategies. The CBOE Volatility Index (VIX) quantifies market expectations of volatility, offering valuable insights for traders and investors.