The VIX is often called the “fear gauge” because it tends to rise when market uncertainty and fear increase, reflecting higher expected volatility. J.P. Morgan Wealth Management is a business of JPMorgan Chase & Co., which offers investment products and services through J.P. Morgan Securities LLC (JPMS), a registered broker-dealer and investment adviser, member FINRA and SIPC.
What Is the CBOE Volatility Index (VIX)?
She holds a Bachelor of Science in Finance degree from Bridgewater State University and helps develop content strategies.
Comparing VIX Movements With S&P 500 Trends
The problem with using VIX in this manner is that it is designed to be a predictive measure. And an investor looking to buy low needs prices to actually fall before making a move. Buying before a fall is the opposite of a successful investment strategy.
What is the VIX?
- VIX futures are derivatives based on the VIX Index, allowing investors to trade on future volatility expectations.
- The VIX tends to have an inverse relationship with the S&P 500’s price.
- The higher the VIX, the greater the level of fear and uncertainty in the market, with levels above 30 indicating tremendous uncertainty.
- JPMS, CIA and JPMCB are affiliated companies under the common control of JPMorgan Chase & Co.
Before we try to understand how the VIX is calculated, it’s important to grasp the basics of options contracts. You pay a premium for the right, but not the obligation, to buy or sell a stock at a specific price (called the strike price) by a specific date (the expiration date). The higher the VIX, the greater the level of fear and uncertainty in the market, with levels above 30 indicating tremendous uncertainty. 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.
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- In normal market conditions, the VIX typically oscillates between 15 and 20, with readings above 30 signaling significant market stress.
- The CBOE Volatility Index (VIX), often referred to as the „Fear Index,” provides a benchmark for the market’s future volatility expectations.
However, you can trade the VIX through a variety of investment products, like exchange-traded funds (ETFs), exchange-traded notes (ETNs), and options that are tied to the VIX. Trading the VIX with these securities could be a hedging strategy, but like all investments, it carries risk, including the potential for volatility in the value of the VIX. Consider pursuing these advanced strategies only if you’re an experienced trader. Downside risk can be adequately hedged by buying put options, the price of which depends on market volatility. Astute investors tend to buy options when the VIX is relatively low and put premiums are cheap. Volatility is one of the primary factors that affect stock and index options’ prices and premiums.
This suggests investors are complacent and not expecting much volatility. However, news breaks that a major global event (e.g., a geopolitical crisis, a major economic announcement) is imminent. Investors become concerned about the potential impact on the market and start buying put options to protect their portfolios. This signals increased uncertainty and the potential for a market correction. The VIX index distills all the information from these options prices to generate a single number representing market expectations of volatility. Like other indexes, you can’t invest in the VIX directly.
CBOE launched the first VIX-based exchange-traded futures contract in March 2004, followed by the launch of VIX options in February 2006. 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. 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). If you care what happens with markets over the next 30 days you are taking the wrong approach to investing.
In many cases, when the stock market goes down in price, the VIX increases. 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. The VIX is an important barometer of market volatility and investor sentiment. Derived from S&P 500 options, it offers a snapshot of how fearful or complacent traders are feeling. From managing risk to trading options, the VIX has become a must-watch indicator for anyone serious about the markets. Known as the market’s „fear gauge,” the VIX often spikes during times of uncertainty and investor anxiety.
Such VIX-linked instruments allow pure volatility exposure and have created a new asset class. The CBOE Volatility Index (VIX) is a real-time market index extensively used by investors to evaluate market sentiment and perceived risk. The VIX represents 11 sectors of the stock market expectations for volatility in S&P 500 share prices for the next 30 days. The level of the VIX is based on the price of a basket of options that expire in the next month. It can be thought of as a crowd sourced view of how volatile traders believe the S&P 500 will be in the near term.
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Manage Portfolio Volatility
The VIX tends to revert to its long-term average over time, known as mean reversion. This means extremely high or low VIX levels don’t last forever. Spikes in the VIX are often temporary responses to short-term uncertainty. Yes, there are several ETFs and ETNs designed to track VIX futures, offering exposure to volatility without directly trading options or futures. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results.
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. Created by the Chicago Board Options Exchange (CBOE), the VIX gives a number that shows how much the S&P 500 index might swing in the coming month.