What is the VIX?
The CBOE S&P 500 Volatility Index (VIX) is known as the “Fear Index” because it is such a helpful gauge to measure how worried traders are that the S&P 500 might suddenly drop within the next 30 days.
When the VIX starts moving higher, it is telling you that traders are getting nervous. When the VIX starts moving lower, it is telling you that traders are gaining confidence.
The VIX is a real-time index that represents the market’s expectation of future volatility of the stock market.
Its formal name is the Chicago Board of Options Exchange Market Volatility Index (VIX).
Technically speaking, volatility measures the standard deviation of historical market prices. Financial mumbo jumbo aside, volatility simply refers to how much price fluctuates over time.
A volatility index is a measure of a particular market’s likelihood of making sudden, unexpected price movements, or its relative instability.
The Chicago Board of Options Exchange Market Volatility Index (VIX) is a measure of implied volatility, based on the prices of a basket of S&P 500 Index options with 30 days to expiration.
The VIX is known by other names like “Fear Gauge” or “Fear Index“.
It is the most well-known volatility index on the market, and.commonly used by stock and options traders to gauge the market’s anxiety level.
A rising VIX indicates that traders expect the S&P 500 Index to become more volatile.
If VIX gives a value of greater than 30 then the market is seen as volatile, while under 20 is believed to be calm.
The higher the VIX, the higher the fear
For contrarians, high readings are bullish.
A falling VIX indicates that traders in the options market expect the S&P 500 Index to trade more quietly.
The lower the VIX, the lower the fear.
This indicates a more complacent market.
For contrarians, low sustained readings are bearish.
When and Where does the VIX trade?
The VIX Index is not directly tradable, but the VIX methodology provides a formula for replicating volatility exposure with a portfolio of SPX options, an innovation that led to the creation of tradable VIX futures and options.
The VIX Index is calculated and disseminated overnight, providing market participants with real-time volatility information whenever news breaks.
The Chicago Board Options Exchange rolled out the VIX in 1993 during regular trading hours between 9:30 a.m. and 4:15 p.m. ET.
In 2016, the CBOE activated the index outside of U.S. trading hours and between 3 a.m. and 9:15 a.m ET.
Monthly and weekly expirations in VIX options are available and trade during U.S. regular trading hours and during a limited global trading hours session.
There are several ETFs (Exchange Traded Funds) that mirror the VIX such as VXX, VIXY, and VIIX.