VIX Index: How Wall Street’s ‘Fear Gauge’ Measures Market Volatility

VIX Index: How Wall Street’s ‘Fear Gauge’ Measures Market Volatility

29 Jan 2025 | 04:26 PM

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. J.P. Morgan Wealth Management is a business of JPMorgan Chase & Co., which offers investment products and services through J.P. Morgan Securities LLC (JPMS), a registered broker-dealer and investment adviser, member FINRA and SIPC. Insurance products are made available through Chase Insurance Agency, Inc. (CIA), a licensed insurance agency, doing business as Chase Insurance Agency Services, Inc. in Florida. Certain custody and other services are provided by JPMorgan Chase Bank, N.A.

Comparing VIX Movements With S&P 500 Trends

VIX values below 20 generally correspond to stable, stress-free periods in the markets. Because option prices are public, they can be used to determine the volatility of an underlying security. Such volatility, as implied by or inferred from market prices, is called forward-looking implied volatility (IV).

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The CBOE Volatility Index (VIX), often referred to as the “Fear Index,” provides a benchmark for the market’s future volatility expectations. It is a critical tool for investors and traders to assess market risk and sentiment, helping them make informed decisions. As the VIX tends to rise when markets decline and fall when they advance, it serves as an inverse indicator of market trends.

What Is the VIX? This ‘Fear Index’ Is Used for Active Investing

High VIX readings don’t automatically signal market bottoms, nor do low readings immediately precede tops. The index can remain at elevated or depressed levels much longer than investors expect, and using it in isolation for market timing often leads to premature or misguided investment decisions. Another common misunderstanding is treating VIX levels as absolute indicators that mean the same thing in all market conditions. What constitutes a “high” or “low” VIX reading varies significantly depending on the broader market environment, economic conditions, and historical context.

Are you at the beginning of your career and looking for long-term growth? While the formula is mathematically complex, it theoretically estimates the S&P 500 Index volatility by averaging the weighted prices of various SPX puts and calls across many strike prices. The VIX attempts to measure the magnitude of the S&P 500’s price movements (i.e., its volatility). The more dramatic the price swings in the index, the higher the level of volatility, and vice versa. The current reading on the VIX is 15.5 as of this writing, and the VIX has been relatively low since March 2023.

A cross of the 20-period moving average around which the band is built signifies a coming overbought or oversold condition. For privacy and data protection related complaints please contact us at Please read our PRIVACY POLICY STATEMENT for more information on handling of personal data. “Chase Private Client” is the brand name for a banking and investment product and service offering, requiring a Chase Private Client Checking℠ account.

Q. Why is the VIX called the “fear gauge”?

There’s more to it, but basically, the VIX is calculated as the square root of the expectation of price changes in the S&P 500 over the next 30 days. The VIX measures the market’s expectations for volatility over the next 30 days based on the bid and ask prices of S&P 500 index options (called the SPX options). Managers of actively managed mutual funds attempt to outperform a benchmark index.

Profit and prosper with the best of Kiplinger’s advice on investing, taxes, retirement, personal finance and much more. As with any investing vehicles, traders should carefully consider the stated goals, suggested holding periods and liquidity of these instruments. Essentially, the VIX index is a forward-looking measure of how much the market expects the S&P 500 to fluctuate over the next 30 days, expressed as an annualized percentage. Throughout its existence, the VIX has served as an invaluable witness to major market events. During the 1987 Black Monday crash, estimates suggest the index would have reached approximately 150 had it existed then. More recently, it hit dramatic peaks of 89.53 during the 2008 Financial Crisis and 82.69 amid the 2020 COVID-19 market crash.

There’s no crystal ball for the stock market, but there are indexes that help investors gauge expected risk. It can offer a sense of future volatility, Acciones en netflix or how bumpy things could get, for the US stock market over the next 30 days. Learn how the VIX works, how it’s calculated, and what a high or low VIX could mean for your investments. The VIX, which was first introduced in 1993, is sometimes called the “fear index” because it can be used by traders and investors to gauge market sentiment and see how fearful, or uncertain, the market is. The VIX typically spikes during or in anticipation of a stock market correction. Generally, the higher the VIX (as a result of increased options demand and thus prices), the less certainty investors have about future prices in the US stock market over the next 30 days.

A VIX reading of 20 might be considered high during a calm bull market but relatively low during periods of economic uncertainty. The Chicago Board Options Exchange Volatility Index, commonly known as the VIX, emerged in 1993 as a groundbreaking tool that would forever change how investors measure and interpret market fear. Commissioned by the CBOE and developed by Professor Robert Whaley, the index initially focused on S&P 100 (OEX) options before evolving into its current form. In this article, we’ll demystify the VIX Index by exploring its historical significance, how it’s calculated, and its practical applications. By the end, you’ll have a solid grasp of how the VIX can be integrated into your investment strategy to better manage market risks and potentially capitalize on market movements. Options trading entails significant risk and is not appropriate for all investors.

Be sure to consult with an investment & tax professional before implementing any investment strategy. While many investors recognize the VIX as “the fear gauge,” far fewer understand what it actually measures and how to interpret it. 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. Traders can use VIX futures, options, and ETFs to hedge or bet on changes in the index’s volatility.In general, volatility can be measured using two different methods.

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• So if the VIX is lower compared to recent levels, it may be considered a low value for that time period.
• But because of how they’re constructed, even the best volatility ETFs tend to decline in value over time, even if they do spike higher in times of intense volatility.
• The VIX index distills all the information from these options prices to generate a single number representing market expectations of volatility.
• Investors become concerned about the potential impact on the market and start buying put options to protect their portfolios.
• While many investors recognize the VIX as “the fear gauge,” far fewer understand what it actually measures and how to interpret it.

The pool of money is used to purchase a portfolio of assets that duplicates the performance of the target index. Dividends, interest and capital gains are paid out to investors regularly. A financial market index groups together assets of a similar type—stocks or bonds, currencies or commodities—and tracks their price performance over time.

How Can I Use the VIX Level to Hedge Downside Risk?

• This kind of market typically reflects complacency, or a lack of fear.
• The VIX can fluctuate at different levels depending on market conditions, so it may be impossible to peg a “normal” value.
• Volatility is a statistical measure based on how much an asset’s price moves in either direction and is often used to measure the riskiness of an asset or security.
• In reality, the VIX simply measures expected volatility – the magnitude of potential price movements – without indicating direction.

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What Is The VIX Index? Your Guide to Understanding Market Fear and Managing Risk

It should be noted that these are rough guidelines ⏤ unexpected events can throw a wrench into markets and a low VIX level today could be followed by a period of extreme volatility if circumstances change. Also known as the “Fear Index,” the Volatility Index (VIX) is a contrarian sentiment indicator that helps to determine when there is too much optimism or fear in the market. The market typically reverses course when sentiment reaches one extreme or the other.

Fund managers create portfolios that mirror the makeup of their target index with a goal of duplicating its performance. For example, an S&P 500 index fund would own the stocks included in the index and attempt to match the overall performance of the S&P 500. Elizabeth Volk has been writing about the stock and options markets since 2007. Her analysis has been featured on CNBC, published in Forbes and SFO Magazine, syndicated to Yahoo Finance and MSN, and quoted in Barron’s, The Wall Street Journal, and USA Today. 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.