What Is the VIX®?

what is the vix telling us

Such volatility, as implied by or inferred from market prices, is called forward-looking implied volatility (IV). 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 finally, the standard deviation on the historical price data sets. The VIX attempts to measure the magnitude of price movements of the S&P 500 (i.e., its volatility).

what is the vix telling us

Examples are hypothetical, and we encourage you to seek personalized advice from qualified professionals regarding specific investment issues. Our estimates are based on past market performance, and past performance is not a guarantee of future performance. Sentiment plays a big role in decision making for the stock markets, and to that extent, it could be a good idea to glance at the VIX.

What Is the VIX®?

If you’ve been following financial news, you may have heard the word “volatility” being thrown around a lot — and you may have heard a reference to a volatility measurement called the VIX. NerdWallet, Inc. is an independent publisher and comparison service, not an investment advisor. Its articles, interactive tools and other content are provided to you for free, as self-help tools and for informational purposes only. NerdWallet does not and cannot guarantee the accuracy or applicability of any information in regard to your individual circumstances.

what is the vix telling us

It breaks down investor anxiety into three distinct categories—1. The VIX is considered a reflection of investor sentiment, but one must remember that it is supposed to be a leading indicator. In other words, it should not be construed as a sign of an immediate market movement. 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 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).

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Only SPX options are considered whose expiry period lies within more than 23 days and less than 37 days. The investing information provided on this page is for educational purposes only. NerdWallet, Inc. does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments. Although the VIX revealed high levels of investor anxiety, the Investopedia Anxiety Index (IAI) remained neutral. The IAI is constructed by analyzing which topics generate the most reader interest at a given time and comparing that with actual events in the financial markets.

Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas’ experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning.

  1. The VIX attempts to measure the magnitude of price movements of the S&P 500 (i.e., its volatility).
  2. In other words, it should not be construed as a sign of an immediate market movement.
  3. Only SPX options are considered whose expiry period lies within more than 23 days and less than 37 days.
  4. She has worked in multiple cities covering breaking news, politics, education, and more.
  5. All expressions of opinion are subject to change without notice in reaction to shifting market conditions.

Typically, the performance of the VIX index and the S&P 500 are inversely related to each other. In other words, when the price of VIX is going up, the price of the S&P 500 is usually heading south. Following the popularity of the VIX, the CBOE now offers several other variants for measuring broad 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). 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). 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.

What is VIX?

VIX values below 20 generally correspond to stable, stress-free periods in the markets. The formula used by Cboe to calculate the price of VIX is rather complex, and the price of VIX is updated live during trading hours every https://www.tradebot.online/ 15 seconds. To spare you the math headache involved with calculating the price, let’s look instead at the data used to calculate it. The VIX index is specifically measuring expected volatility for another index, the S&P 500.

Extending Volatility to Market Level

This may influence which products we review and write about (and where those products appear on the site), but it in no way affects our recommendations or advice, which are grounded in thousands of hours of research. Our partners cannot pay us to guarantee favorable reviews of their products or services. Options and futures based on VIX products are available for trading on CBOE and CFE platforms, respectively. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources.

As a market maker, you sell a product, which grows in value if certain situations occur. So, if you’re sitting at your desk one day, and you start seeing more and more orders coming in for an option, you might think these traders know something you don’t, and the markets will make a big move soon. As the range of strike prices for puts and calls on the S&P 500 increases, it indicates that the investors placing the options trades are predicting some price movement up or down.

VIX and the S&P 500

When stock prices are expected to make a big move up or down, investors typically purchase more options. For example, suppose the market has been falling for a few days. This would cause many investors to become protective of their stock positions. The Charles Schwab Corporation provides a full range of brokerage, banking and financial advisory services through its operating subsidiaries.

Many or all of the products featured here are from our partners who compensate us. This influences which products we write about and where and how the product appears on a page. For example, on Nov. 9, 2017, the VIX climbed 22% during the trading session on fears of delays in the tax reform plan.

When investors trade options, they are essentially placing bets on where they think the price of a specific security will go. In many cases, large institutional investors will use options trading to hedge their current positions. So, if the big firms on Wall Street are anticipating an upswing or downswing in the broader market, they may try to hedge against that volatility by placing options trades. If many of the large investment firms are anticipating the same thing, there is usually a spike in options trading for the S&P 500.