What is the VIX?

The higher the VIX, the greater the level of fear and uncertainty in the market, with levels above 30 indicating tremendous uncertainty. During its origin in 1993, VIX was calculated as a weighted measure of the implied volatility of eight S&P 100 at-the-money put and call options, when the derivatives market had limited activity and was in its growing stages. 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. These funds use derivatives like VIX futures to either bet on or against volatility. Some are designed to spike when markets panic, while others benefit when volatility trends low.

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If prices gain a great deal very quickly, or fall very far, very rapidly, the principle of mean reversion suggests they should snap back to their long-term average before long.
The higher the VIX, the greater the level of fear and uncertainty in the market, with levels above 30 indicating tremendous uncertainty.
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The first method is based on historical volatility, using statistical calculations on previous prices over a specific time period.
The real-time VIX values quoted in the financial media (aka the “spot” or “cash” VIX) should be regarded as statistics.

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It’s important to note here that while volatility can have negative connotations, like greater risk, more stress, deeper uncertainty or bigger market declines, volatility itself is a neutral term. It’s simply a statistical measure of price changes for a security or an index. Greater volatility means that an index or security is seeing bigger price changes—higher or lower—over shorter periods of time. However, the VIX can be traded through futures contracts, exchange-traded funds (ETFs), and exchange-traded notes (ETNs) that own these futures contracts. 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).

By measuring expected future volatility, the VIX offers insights into the collective emotions of market participants. While it has limitations, the VIX remains a valuable tool for risk management, hedging, and market timing. It only provides a 30-day outlook, which may not capture longer-term trends or risks. It is also reactive, reflecting current market sentiments rather than predicting future events. Lastly, understanding and interpreting the VIX requires a good grasp of options pricing and market dynamics, which can be challenging for new investors. Often referred to as Wall Street’s “fear gauge,” the VIX provides insights into market volatility and investor sentiment.

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On top of that, volatility tends to revert to the mean, so any spike is usually followed by a pullback. The 0.85% expense ratio accelerates that drag, and because this VIX ETF holds futures, investors also receive a K-1 form at tax time, which can complicate filings. Traders can employ different strategies using the VIX to take advantage of market volatility. When the VIX is high, indicating increased volatility, traders may consider selling options to generate income. Conversely, when the VIX is low, traders may look for opportunities to buy options as a way to hedge their positions or speculate on potential market moves.

Implications for Investment Strategy

First introduced by the Chicago Board Options Exchange (Cboe) in 1993, the initial version of the VIX reflected a rolling 30-day calculation of at-the-money implied volatility (IV) on S&P 100 Index (OEX) options. This calculation is no longer widely used or tracked, but the “old VIX” is still available under the ticker symbol VXO. VIX options are contracts that give investors the right, but not the obligation, to trade the VIX futures at a predetermined price before expiration. The VIX is often called the “fear gauge” because it tends to rise when market uncertainty and fear increase, reflecting higher expected volatility.

ProShares VIX Mid-Term Futures ETF (VIXM)

It is important to note that trading the VIX and volatility products can be complex and involves risks. Volatility fxprimus review can be unpredictable, and the VIX itself can experience significant fluctuations. Traders should carefully consider their risk tolerance and have a thorough understanding of the products they are trading before engaging in volatility trading strategies. When the VIX is high, it suggests that investors anticipate increased market volatility and fear. Conversely, when the VIX is low, it indicates a more complacent market environment. It is important to note that extreme levels of the VIX are rarely sustained for long periods of time, and the index tends to revert to its mean.

On top of that, volatility tends to revert to the mean, so any spike is usually followed by a pullback.
The 0.85% expense ratio accelerates that drag, and because this VIX ETF holds futures, investors also receive a K-1 form at tax time, which can complicate filings.
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As an investor, if you see the VIX rising it could be a sign of volatility ahead.

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When the VIX rises to such high values, that means investors expect greater market volatility in the near future. Cboe uses a complex calculation to arrive at the VIX—a number that changes in real-time throughout the day like stock and other index prices. The calculation takes into account the real-time average prices between the bid and ask for options with various future expiration dates. 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 index tracks the tendency of the S&P 500 to move 20 50 and 200 day moving average away from and then revert to the mean. When the stock markets appear relatively calm but the VIX index spikes higher, professionals are betting that prices on the S&P 500—and thereby the stock market as a whole—may be moving higher or lower in the near term.

Products based on other market indexes include the Nasdaq-100 Volatility Index (VXN); the CBOE DJIA Volatility Index (VXD); and the CBOE Russell 2000 Volatility Index (RVX). Analyze the market sentiments & identify the trend reversal for strategic decisions. Yes, UVXY offers 1.5x leveraged exposure to front-month VIX futures, making it more sensitive to daily volatility movements. To help mitigate this, the Volatility Shares ETF maintains a hedging overlay using out-of-the-money VIX call options. These hedges are designed to limit the ETF’s worst-case losses, but they won’t fully protect against major volatility shocks. Because of this, this ETF amplifies the benefits of contango and mean reversion.

If prices gain a great deal very quickly, or fall very far, very rapidly, the principle of mean reversion suggests they should snap back to their long-term average before long. Market professionals rely on a wide variety of data sources and tools to stay on top of the market. The VIX is one the main indicators for understanding when the market is possibly headed for a big move up or down or when it may be ready to quiet down after a period of volatility. Following the popularity of the VIX, the CBOE now offers several other variants for measuring broad market volatility. Options and futures based on VIX products are available for trading on CBOE and CFE platforms, respectively.

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The VIX is an index run by the Chicago Board Options Exchange, now known as Cboe, that measures the stock market’s expectation for volatility over the next 30 days based on option prices for the S&P 500 stock index. 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. 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. The lower the VIX (due to the lower relative options demand and prices), the more certainty investors may feel they have about US stock market prices over the next 30 days. That said, the VIX is intended to measure short-term volatility rather than act as an index that’s always moving the opposite way as stock prices. CFE lists nine standard (monthly) VIX futures contracts, and six weekly expirations in VIX futures.

When the VIX index moves higher, this reflects the fact that professional investors are responding to more price volatility in the S&P 500 in particular and markets more generally. When the VIX declines, investors are betting there will be smaller price moves up or down in the S&P 500, which implies calmer markets and less uncertainty. 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.

VIX ETFs are highly advanced, expensive products that often behave in ways counterintuitive to most retail investors. The biggest misunderstanding is that none of these ETFs track the actual spot VIX. They all follow some version of VIX futures, which are correlated to the spot VIX but can behave very differently depending on which contracts are tracked and the shape of the VIX futures curve.

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. Specifically, intraday VIX quotes are calculated from a basket of short-term SPX options that are weighted to maintain a constant average maturity of 30 days.

Though it can’t be invested in directly, you can purchase ETFs that track the VIX. When its level gets to 20 or higher, expectations are that volatility will be above normal over the coming weeks. Just keep in mind that with investing, there’s no way to predict future stock market performance or time the market.

Get stock recommendations, portfolio guidance, and more from The Motley Fool’s premium services. This inverse ETF is best used as a tactical play, such as buying it after a volatility spike, when the VIX is expected to revert lower. It’s not a long-term core holding but can work as a short-term position in a falling volatility environment. The ProShares VIX Mid-Term Futures ETF (VIXM -3.82%) offers a more tempered alternative to short-term volatility products like the ProShares VIX Short-Term Futures ETF (VIXY). Profit and prosper with the best of Kiplinger’s advice on investing, taxes, retirement, personal finance and much more. The current version of the VIX, which has been in popular use since 2003, offers a more comprehensive look at options IV by considering a range of near-the-money call and put strikes on the broader S&P 500.