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.

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.

RELATED TERMS
  1. VIX Option

    A VIX option is a derivative security based on the CBOE Volatility ...
  2. CBOE Russell 2000® Volatility Index ...

    The CBOE Russell 2000® Volatility Index is an indicator of the ...
  3. Market Sentiment

    Market sentiment reflects the overall attitude or tone of investors ...
  4. VolDex® Implied Volatility Indexes ...

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

    The S&P/ASX 200 VIX, or A-VIX, reflects the expected volatility ...
  6. Local Volatility

    Local volatility is a volatility measure used in quantitative ...
Related Articles
  1. Investing

    The VIX: Using the "Uncertainty Index" for Profit and Hedging

    Learn the best ways to profit from and hedge volatility using VIX and alternative strategies.
  2. Trading

    Determining Market Direction With VIX

    The CBOE's volatility index is a helpful market indicator. Learn how it can gauge the mood of the stock market.
  3. Trading

    Volatility - The Birth Of A New Asset Class

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

    What Does the Volatility Index (VIX) Indicate?

    The VIX is often called the fear gauge of the markets – understand what it means for your investments.
  5. Trading

    Strategies To Trade Volatility Effectively With VIX

    VIX offers a bird’s eye view of real-time greed and fear, while providing a snapshot of the market’s expectations for volatility in the next 30 days.
  6. Investing

    The VIX Is a 'Giant Casino' That May Magnify Losses

    The VIX has spawned a giant trading ecosystem that may lead to major losses when turbulence hits
  7. Investing

    Top 3 Inverse Volatility ETFs for 2018

    By seeking the inverse of the performance of the volatility index, some investors make strong returns.
  8. Investing

    Why the VIX Index Is a Bullish Sign for Stocks

    Stocks have been on a wild ride this year, but the main fear index has been relatively calm. 
  9. Investing

    Wall Street's 'Fear Gauge' is Off: Goldman Sachs

    Goldman Sachs sees more market volatility than the VIX is reflecting adding to the recent debate about its reliability.
RELATED FAQS
  1. What are the most effective hedging strategies to reduce market risk?

    Learn about different hedging strategies to reduce portfolio volatility and risk, including diversification, index options ... Read Answer >>
  2. Is volatility a good thing or a bad thing from the investor's point of view, and ...

    Learn the basics of volatility in the stock market and how the increased risk provides greater opportunities for profit for ... Read Answer >>
  3. What is index option trading and how does it work?

    Learn about stock index options, including differences between single stock options and index options, and understand different ... Read Answer >>
Trading Center