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). The second method, which the VIX uses, involves inferring its value as implied by options prices. Options are derivative instruments whose price depends upon the probability of a particular stock’s current price moving enough to reach a particular level (called the strike price or exercise price). The CBOE Volatility Index (VIX), also known as the Fear Index, measures expected market volatility using a portfolio of options on the S&P 500.
It is an important index in the world of trading and investment because it provides a quantifiable measure of market risk and investors’ sentiments. However, the VIX can be traded through futures contracts, exchange-traded funds (ETFs), and exchange-traded notes (ETNs) that own these futures contracts. All qualifying options need valid bid and ask prices to show market views on which strike prices will be met before expiry. 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. Only SPX options are considered whose expiry period lies between 23 and 37 days.
How Much AI Spending Is Too Much? Investors are Starting to Wonder
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. The first method is based on historical volatility, using statistical calculations on previous prices over a specific time period. This process involves computing various statistical numbers, like mean (average), variance, and the standard deviation on the historical price data sets. Downside risk can be adequately hedged by buying put options, the price of which depends on 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). She holds a Bachelor of Science in Finance degree from Bridgewater State University and helps develop content strategies.
Instead, investors can take a position in VIX through futures or options contracts, or through VIX-based exchange-traded products (ETPs). For example, the ProShares VIX Short-Term Futures ETF (VIXY) and the iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX) are two such offerings that track a certain VIX-variant index and take positions in linked futures contracts. 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. A methodology was adopted that remains in effect and is also used for calculating various other variants of the volatility index.
Key data points
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. Copyright © 2025 FactSet Research Systems Inc.Copyright © 2025, American Bankers Association. SEC fillings and other documents provided by Quartr.© 2025 TradingView, Inc. As the derivatives markets matured, 10 years later, in 2003, the CBOE teamed up with Goldman Sachs and updated the methodology to calculate the VIX differently.
The Dow Turns Higher. Stock Market Breadth Is Improving.
- Downside risk can be adequately hedged by buying put options, the price of which depends on market volatility.
- The higher the VIX, the greater the level of fear and uncertainty in the market, with levels above 30 indicating tremendous uncertainty.
- CBOE launched the first VIX-based exchange-traded futures contract in March 2004, followed by the launch of VIX options in February 2006.
- The VIX has paved the way for using volatility as a tradable asset, albeit through derivative products.
The VIX was the first benchmark index introduced by CBOE to measure the market’s expectation of future volatility. 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. Options and futures based on VIX products are available for trading on the CBOE and CFE platforms, respectively.
- As the VIX tends to rise when markets decline and fall when they advance, it serves as an inverse indicator of market trends.
- While the index isn’t tradable, investors can engage with VIX-linked products such as futures, options, ETFs, and ETNs to leverage its movements.
- For example, the ProShares VIX Short-Term Futures ETF (VIXY) and the iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX) are two such offerings that track a certain VIX-variant index and take positions in linked futures contracts.
- 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.
- She holds a Bachelor of Science in Finance degree from Bridgewater State University and helps develop content strategies.
- SEC fillings and other documents provided by Quartr.© 2025 TradingView, Inc.
In 1993, the VIX was first calculated using the implied volatility of eight S&P 100 at-the-money options. The derivatives market then had limited activity and was still growing. 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.
Does the Level of the VIX Affect Option Premiums and Prices?
Astute investors tend to buy options when the VIX is relatively low and put premiums are cheap. Such protective puts will generally get expensive when the market is sliding; therefore, like insurance, it’s best to buy them when the need for such protection is not obvious (i.e., when investors perceive the risk of market downside to be low). The higher the VIX, the greater the level of fear and uncertainty in the market, with levels above 30 indicating tremendous uncertainty.
How Can an Investor Trade the VIX?
As a rule of thumb, VIX values greater than 30 are generally linked to significant volatility resulting from increased uncertainty, risk, and investors’ fear. VIX values below 20 generally correspond to stable, stress-free periods in the markets. The CBOE Volatility Index (VIX) is a real-time market index extensively used by investors to evaluate market sentiment and perceived risk. By representing the expected volatility of the S&P 500 over the next 30 days, the VIX acts as a barometer of investor fear and uncertainty, making it a crucial indicator in assessing market dynamics. The VIX has paved the way for using volatility as a tradable asset, albeit through derivative products. CBOE launched the first VIX-based exchange-traded futures contract in March 2004, followed by the launch of VIX options in February 2006.
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. While the index isn’t tradable, investors can engage with VIX-linked products such as futures, options, ETFs, and ETNs to leverage its movements. Understanding VIX levels, particularly those above 30, which indicate high market volatility, can guide investors in hedging strategies and pricing derivatives.
Active traders who employ their own trading strategies and advanced algorithms use VIX values to price the derivatives, which are based on stocks with high beta. Beta represents how much a particular stock price can move with respect to the activity of the broader market index. Such VIX-linked instruments allow pure volatility exposure and have created a new asset class.
Volatility is one of the primary factors that affect stock and index options’ prices and premiums. As the VIX is the most widely watched measure of broad market volatility, it has a substantial impact on option prices or premiums. A higher VIX means higher prices for options (i.e., more expensive option premiums) while a lower VIX means lower option prices or cheaper premiums. For instance, a stock with a beta of +1.5 indicates that it is theoretically 50% more volatile than the market. Forex basic Traders making bets through options of such high beta stocks utilize the VIX volatility values in proportion to correctly price their options trades. Following the popularity of the VIX, the CBOE now offers several other variants for measuring broad market volatility.
