The VIX

The Cboe Volatility Index, known as the VIX, measures the market's expectation of S&P 500 volatility over the next 30 days, derived from the prices of S&P 500 index options. It is quoted in annualised percentage points: a VIX of 20 means options are pricing roughly 20% annualised volatility. Because the VIX tends to jump when stocks fall, it is often called Wall Street's "fear gauge". It is also the basis for actively traded futures, options and exchange traded products.

How the VIX is calculated#

The current methodology, introduced in 2003, does not use any single option or the Black Scholes model. Instead it combines prices of many out of the money S&P 500 puts and calls across a wide range of strikes, for two expiries that bracket 30 days, and interpolates to a constant 30 day horizon. The formula estimates the expected variance of returns, and the VIX is its square root times 100. This approach is closely related to the pricing of variance swaps. See Variance and Volatility Swaps.

What VIX levels mean#

The long run average has been around 19 to 20. The VIX closed at a record high of 82.69 on 16 March 2020 during the COVID crash, above its 2008 financial crisis peak of 80.86 in November 2008. See The COVID-19 Crash and The 2008 Financial Crisis.

Converting VIX to expected moves#

expected 30 day move ≈ VIX / √12
expected daily move ≈ VIX / √252

VIX and stock prices#

The VIX usually moves opposite to the S&P 500, rising sharply in selloffs and drifting lower in rallies. The relationship is asymmetric: falls in stocks tend to lift the VIX more than equal rises lower it. That pattern reflects demand for downside protection and the volatility skew. See Volatility Smile and Skew.

You cannot buy the VIX directly#

The VIX itself is an index calculation, not an asset. Traders get exposure through:

• VIX futures: contracts on where the VIX will be at future dates.
• VIX options: options on VIX futures values, cash settled.
• Exchange traded products: funds and notes that hold VIX futures.

VIX futures and contango#

VIX futures usually trade above the spot VIX when markets are calm (contango) and below it during panics (backwardation). In contango, products that hold short dated VIX futures and roll them monthly lose value over time, as each roll sells cheaper expiring futures to buy more expensive later ones. Long VIX products have historically lost most of their value over long holding periods for this reason. See Contango, Backwardation and Volatility Term Structure.

Volmageddon#

On 5 February 2018, the VIX more than doubled in a single day, from about 17 to about 37. Exchange traded products that were short VIX futures lost most of their value, and one, the VelocityShares Daily Inverse VIX ETN (XIV), lost over 90% and was terminated. The episode showed the risks of short volatility strategies. See Theta Harvesting.

Other volatility indices#

Cboe publishes related indices, including VIX9D (9 day), VIX3M (3 month), VVIX (the volatility of the VIX), and volatility indices for the Nasdaq 100 (VXN) and Russell 2000 (RVX).

How traders use the VIX#

• Sentiment gauge: very high readings often occur near market lows; very low readings can signal complacency. See Sentiment Data.
• Hedging: VIX calls can hedge equity portfolios, though their cost and timing are tricky.
• Strategy selection: options strategies often depend on the volatility level.
• Risk management: position sizes can be scaled down when the VIX is high.

Frequently asked questions#

What is the VIX?#

An index calculated by Cboe that measures expected 30 day volatility of the S&P 500, derived from S&P 500 option prices.

What is a high VIX level?#

Readings above 30 usually signal market stress; the long run average has been around 19 to 20.

Can I invest in the VIX?#

Not directly. Exposure comes through VIX futures, options and exchange traded products, which behave differently from the spot index and can lose value over time.

Next, learn why implied volatility differs across strikes in Volatility Smile and Skew.

Sources#

• Cboe, VIX index