The Volatility Index: Reading Market Sentiment

Profit and prosper with the best of Kiplinger’s advice on investing, taxes, retirement, personal finance and much more. 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. Investors may use the VIX to hedge against market downturns or to speculate on future market volatility.

Even after the extreme bearishness of 2008 to 2009, the VIX moved back to that normal range. Notice how the VIX established a support area near the 19-point level early on and returned to it in previous years. Support and resistance areas have formed over time, even in the trending market from 2003 to 2005. Institutions can’t quickly unload the stock when the market is turning bearish. Instead, they buy put option contracts or sell call option contracts to offset some of the expected losses.

Ask a Financial Professional Any Question

Some of the more popular and active of these include the iPath Series B S&P 500 VIX Short Term Futures ETN (VXX), the ProShares Ultra VIX Short-Term Futures ETF (UVXY) and the Short VIX Short-Term Futures ETF (SVXY). « If the VIX is high, it’s time to buy » tells us that market participants are too bearish and IV has reached capacity. This means the market will likely turn bullish and implied volatility will likely move back toward the mean. The optimal option strategy is to be delta positive and vega negative (i.e., short puts would be the best strategy). Delta positive simply means that as stock prices rise so does the option price, while negative vega translates into a position that benefits from a decrease in the IV.

One of the most recognized barometers of fluctuations in financial markets, the VIX measures how much volatility investing experts expect to see in alpari forex broker review the market over the next 30 days. This measurement reflects real-time quotes of S&P 500 Index (SPX) call option and put option prices. The Chicago Board Options Exchange Volatility Index, or VIX, is an index that gauges the volatility investors expect in the U.S. stock market. Rather, it’s a leading indicator that measures the level of stock market volatility expected by investors.

There are many financial products linked to the VIX, including ETFs and mutual funds, allowing investors to gain exposure to volatility. As an investor, How to buy cake crypto if you see the VIX rising it could be a sign of volatility ahead. You might consider shifting some of your portfolio to assets thought to be less risky, like bonds or money market funds. Alternatively, you could adjust your asset allocation to cash in recent gains and set aside funds during a down market.

Measuring Market Movers

1. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
2. This team of experts helps Finance Strategists maintain the highest level of accuracy and professionalism possible.
3. We may earn a commission when you click on a link or make a purchase through the links on our site.
4. Rather, it’s a leading indicator that measures the level of stock market volatility expected by investors.

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. It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative envelope channel funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here). The VIX Index is a forward-looking trend indicator used to quantify expectations for future volatility.

Investors can trade a call option or put option to make speculative investments based on anticipated volatility in the markets. They provide investors with exposure to volatility without having to deal with the complexities of trading futures or options. It provides a measure of market risk and investor sentiments by projecting the expected volatility of the S&P 500 index over the next 30 days.

Personal Loans

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 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. True to its name, the S&P 500 index is composed of 500 of the largest publicly traded companies in the U.S. Because the S&P 500 includes so many large companies across several different market sectors, it is generally viewed as a good indication of how the U.S. stock market is performing overall. In addition to VIX options, various VIX-based exchange-traded products (ETPs) exist that track the price action of the index itself and/or some combination of its futures — whether directly, inversely or in a leveraged manner.

How can I trade the VIX?

Generally, a reading of 0 to 12 represents low volatility in the markets, while a range of 13 to 19 is normal volatility. A financial professional will offer guidance based on the information provided and offer a no-obligation call to better understand your situation. Finance Strategists is a leading financial education organization that connects people with financial professionals, priding itself on providing accurate and reliable financial information to millions of readers each year. Our team of reviewers are established professionals with decades of experience in areas of personal finance and hold many advanced degrees and certifications. Over the years, the VIX has been popularly dubbed the « fear gauge » or « fear index » due to its tendency to spike during periods of financial stress.

Our work has been directly cited by organizations including Entrepreneur, Business Insider, Investopedia, Forbes, CNBC, and many others. Finance Strategists has an advertising relationship with some of the companies included on this website. We may earn a commission when you click on a link or make a purchase through the links on our site. All of our content is based on objective analysis, and the opinions are our own.

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). Volatility values, investors’ fears, and VIX values all move up when the market is falling. The reverse is true when the market advances—the index values, fear, and volatility decline. Investors interested in trading the VIX index have a few options for doing so. This can be helpful for gauging and assessing risk in order to capitalize on anticipated market movements.