Loading the player...

What is the 'VIX - CBOE Volatility Index'

The Volatility Index, or VIX, is an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options. This volatility is meant to be forward looking, is calculated from both calls and puts, and is a widely used measure of market risk. The VIX is often referred to as the "investor fear gauge."

Fear, volatility, and the index move up when stock prices are falling and investors are fearful. The index, volatility, and fear decline when stock prices are rising.

Breaking Down 'VIX - CBOE Volatility Index'

The Volatility Index (VIX) lead to two other volatility indexes being created. The VXN, which tracks the NASDAQ 100. The VXD, which tracks the Dow Jones Industrial Average (DJIA).

The VIX, however, was the first successful attempt at creating and implementing a volatility index. Introduced in 1993, it was originally a weighted measure of the implied volatility of eight S&P 100 at-the-money put and call options. Ten years later, in 2004, it expanded to use options based on a broader index, the S&P 500, which allows for a more accurate view of investors' expectations on future market volatility.

VIX values greater than 30 are generally associated with a large amount of volatility as a result of investor fear or uncertainty, while values below 20 generally correspond to less stressful, even complacent, times in the markets.

[ The VIX is commonly used by active traders to identify volatility in the market, where they use technical analysis to identify opportunities to profit in the market. If you're interested in learning more about technical analysis, check out Investopedia's Technical Analysis Course for a comprehensive overview to the subject, with over five hours of on-demand video, exercises, and interactive content. You'll learn how to identify the patterns, trends, and signals that drive price behavior and much more. ] 

How the VIX's Value Is Established

The VIX is a computed index, much like the S&P 500 itself, although it is not derived based on stock prices. Instead, it uses the price of options on the S&P 500, and then estimates how volatile those options will be between the current date and the option's expiration date. The CBOE combines the price of multiple options and derives an aggregate value of volatility, which the index tracks.

The CBOE offers VIX options and VIX futures to trade. Additionally, there are many volatility exchange-traded products (ETPs). One of the most popular, in terms of daily volume, is the iPath S&P 500 VIX Short-Term Futures ETN (VXX).

An Example of the VIX

Movements of the VIX are largely dependent on stock market reactions. When stock prices fall, the VIX will spike. The VIX typically moves much more than the stocks. For example, if stocks fall 3% in one day, the VIX may rise 15% or more.

S&P 500 chart versus VIX chart.

The chart above shows how the S&P 500 and VIX interact. The moves in VIX can be severe, especially if a stock sell-off occurs when the VIX is at very low levels, such as below 15. The sell-off in February saw the S&P 500 decline just under 12%. The VIX, during that time, rallied more than 350% before quickly pulling back once the stock market stabilized again. The S&P 500 decline in March was less shocking to investors; the VIX moved up but much more conservatively, showing fear was at a much lower level relative to February.

  1. Inverse Volatility ETF

    An inverse volatility ETF is a financial product that allows ...
  2. Market Sentiment

    The overall attitude of investors toward a particular security ...
  3. CBOE Russell 2000® Volatility Index ...

    The CBOE Russell 2000® Volatility Index is an indicator of the ...
  4. Sentiment Indicator

    Sentiment indicator refers to a graphical or numerical indicator ...
  5. VolDex® Implied Volatility Indexes ...

    A measure of option cost and implied volatility. The VolDex index ...
  6. S&P/ASX 200 VIX (A-VIX)

    The S&P/ASX 200 VIX, or A-VIX, reflects the expected volatility ...
Related Articles
  1. Trading

    Introducing The VIX Options

    Discover a new financial instrument that provides great opportunities for both hedging and speculation.
  2. Trading

    Volatility - The Birth Of A New Asset Class

    Learn more about the trading possibilities with the VIX.
  3. Investing

    How to Profit From Market Volatility Using ETFs (VXX, VIX)

    Volatility funds offer exposure to high greed and fear levels while avoiding predictions on price direction.
  4. Investing

    Goldman Analysts Explain Major VIX Election Dislocation

    The VIX, commonly known as the "fear index" and charting market volatility, has increased dramatically, but the market hasn't moved much.
  5. Investing

    Volatility Begins Falling Again

    After a few days of reversing course, volatility and volatility-tracking ETFs are falling lower yet again.
  6. Investing

    Stock Volatility Stays at Historic Low (VXX, XIV)

    Stock volatility has plummeted, causing volatility ETFs to crash in value. There's one exception: A fund that's up nearly 700 percent in the last five years.
  7. Trading

    Traders 'Shocked' by VIX Bet That Could Pay $265M

    Investors are shocked that a trader made the largest bullish wager in living memory on the VIX.
  8. Investing

    Is Volatility Set to Turn?

    The most popular volatility index is at its lowest point in history, but a lesser known measure of volatility is hinting that might change soon.
  9. Trading

    3 ETFs for Trading the Spike in Volatility

    Breakouts on the charts of key volatility-related ETFs suggest that investors may want to protect against further volatility in coming weeks.
  1. What is the CBOE Volatility Index? (VIX)

    Find out why investors and analysts use the Chicago Board Options Exchange Volatility Index, or VIX, to measure the market's ... Read Answer >>
  2. What is the relationship between implied volatility and the volatility skew?

    Learn what the relationship is between implied volatility and the volatility skew, and see how implied volatility impacts ... Read Answer >>
  3. How does implied volatility impact the pricing of options?

    Learn about two specific volatility types associated with options and how implied volatility can impact the pricing of options. Read Answer >>
  4. Implied Volatility

    Implied volatility is an important concept in option trading. Learn how it is calculated using the Black-Scholes option pricing ... Read Answer >>
Hot Definitions
  1. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  2. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  3. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  4. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  5. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  6. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
Trading Center