Understanding the CBOE Volatility Index (VIX)

Understanding the CBOE Volatility Index (VIX)

The CBOE Volatility Index is one of the most popular gauges of volatility in the financial markets. It is a real-time index that is derived from the price of SPX options with near-term expiration dates which creates a 30-day projection of expected volatility on the S&P 500. It is also known as the fear index for its ability to highlight investors sentiment. Given the S&P 500’s importance as a leading US stock market indicator and a globally renowned Index, the expected volatility on it could easily affect other indices around the world.

 

Aside from being an index, the VIX is tradable through futures, options and ETFs, for those who are looking to speculate on volatility directly.

 

Putting it simply, the VIX (Figure 1) moves up when markets are falling and will move lower and settle if the market is rising. While it can get to very low prices, it will never go to zero given the evergreen volatility that exists on options. In the example below, the VIX (candles) is overlaid with the S&P 500 e-mini futures (orange).