Volatility Index (VIX)

Benzinga  Sep 30  Comment 
The VIX is currently indicating a high degree of uncertainty in the stock market. This week’s payroll and ISM Manufacturing data could be the keys to the market’s next major move. The options market is currently pricing in a 7...
The Economic Times  Sep 26  Comment 
Analysts attributed the marginal rise in VIX to the uncertainty over the forthcoming money policy review.
Benzinga  Sep 25  Comment 
What is a volatility index, and how can you use one to help your trading? Probably, the most well known volatility index is the VIX, a measure of implied volatility of the S&P 500 index options. In fact, often traders will just look at the...
Clusterstock  Sep 22  Comment 
Pope Francis is visiting the United States, with stops in Washington, Philadelphia, and New York City. Inspired by a tweet from Bloomberg's Tracy Alloway, we decided to take a look at what has happened in the stock market after visits by popes...
Market Intelligence Center  Sep 22  Comment 
Ipath VIX Short-Term Futures ETN (VXX) traded between $22.96 and $24.21 before closing at $23.05 Monday and presents some attractive trading opportunities today according to MarketIntelligenceCenter.com's patented algorithms. The computer program...
Mondo Visione  Sep 21  Comment 
The Chicago Board Options Exchange® (CBOE®) has been named “Best Volatility Trading Platform - Global 2015” byCapital Finance International magazine.  This is the fifth industry award CBOE has received in 2015.  The CFI.co Awards...
Market Intelligence Center  Sep 21  Comment 
For a hedged play on Ipath VIX Short-Term Futures ETN (VXX) MarketIntelligenceCenter.com's patented trade-picking algorithms selected a Feb. '16 $19.00 covered call for a net debit in the $17.28 area. That is also the break-even price for the...
Yahoo  Sep 18  Comment 
Apart from the state of the world economy, the Fed cited financial market volatility and sluggish inflation at home in its decision on Thursday, while leaving the door open for a modest policy tightening later this year. The CBOE volatility index...
Market Intelligence Center  Sep 16  Comment 
Stocks are slightly higher this Wednesday morning as investors, traders, and institutions seem to be regaining some of their lost equilibrium. Volatility is on the decline; at 22.1, the VIX is about half what it was on August 24, the day of the...


The volatility index ("VIX") is an index which measures expectations of volatility, or fluctuations in price, of the S&P 500 index. Higher values for the volatility index indicate that investors expect the value of the S&P 500 to fluctuate wildly - up, down, or both - in the next 30 days.

The index, commonly known by its ticker VIX, is also known as the "fear index" because a high VIX represents uncertainty about future prices. The index is calculated using the price of near-term options on S&P 500 index.[1] Because the value of an option is closely linked to the expected volatility of its underlying security, options prices can be a useful indicator of investors' expectations of volatility.

The VIX hit its historic high of 89.53 on October 24, 2008 on concerns about the 2008 Financial Crisis. Prior to this crisis, the VIX had peaked at 38 on August 8, 2002.

There is no security that realizes the VIX's "return" (like ETFs for regular indices). However, VIX-based futures contracts and options exist for professional investors. In January 2009, iPath launched two securities (VXX and VXZ) that track VIX futures rather than the VIX itself. These securities allow retail investors to speculate on the VIX.[2]

There are other volatility indexes which track expected volatility on other indices: VXD is used as an indicator of expected volatility of the Dow Jones Industrial Average and VXN is used for the NASDAQ 100 index.

What is volatility?

Volatility is the rate at which the price of a certain [security] moves. A security with high volatility has bigger fluctuations in price compared to a security with low volatility. The more quickly a price changes up and down, the more volatile it is. As such, volatility is often used as a measure of risk.

For example: A stock whose price went up 20% yesterday and went down 25% today is more volatile than a stock which increased 2% in both days.

Volatility can be observed by looking at past changes in stock price. The standard deviation of percentage changes in price is used to calculate observed volatility.

Volatility vs. Implied Volatility

Volatility is different from implied volatility, in the sense that volatility is observed by looking at past data, whereas implied volatility represents expectations about future fluctuations.

Volatility expectations, or implied volatility, is deduced from option prices (both call and put) on the underlying security -- since these expectations are reflected in market prices of the option. Higher fluctuation expectations mean that the option has a greater probability of ending in the money, and thus the option commands a higher price and vice versa. By inputting the option price, along with other variables such as maturity, interest rate, strike price and underlying security price, in a pricing model (e.g. Black-Scholes) it is possible to derive an estimate of the investor's expectation of future volatility.

The VIX is calculated by taking into account implied volatility on near-term S&P 500 options with different strike prices. Hence, it represents investor's expectations on how drastically the index may fluctuate in the near future.

Interpreting the VIX

"Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac's talents didn't extend to investing: He lost a bundle in the South Sea Bubble, explaining later, 'I can calculate the movement of the stars, but not the madness of men.' If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases." -- Warren Buffett [3]

The VIX is often referred to as the "Fear Index".[4] Although a high VIX does not represent a definite bearish signal on stock, the market fluctuates most during times of uncertainty. Historically, the VIX has hit its highest points during times of market turmoil and financial downturn.

VIX as a leading Indicator

According to research by CXO Advisory Group,[5] between 1990 and 2005, an extremely high VIX has been followed by periods of high returns on the S&P 500 index, in both short-term (1 month) and medium-term (1 year). The research defined high VIX as being 77% above its 63-day moving average. For example: When the VIX was 135% above its 63-day moving average, the S&P 500 returned 14 percent over the next year.


  1. CBOE paper on VIX, retrieved August 20, 2009
  2. Seeking Alpha, Retrieved April 23, 2009
  3. Annual letter to shareholder's of Berkshire Hathaway (2005), Retrieved 10/14/2008
  4. Motley Fool, 4/3/2007, Retrieved 10/14/2008
  5. CXO Advisory Group, Retrieved 10/14/2008
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