CBOE Volatility Index (VIX) Definition & Strategy

The VIX volatility index (VIX^) is a real-time market index that measures the stock market’s expectation of 30 day forward-looking market volatility. It was created by the CBOE, or the Chicago Board Options Exchange. The indexes value is derived from the price inputs of the S&P 500 options, therefore representing the expectation of market risk and volatility.

The VIX volatility index is known by other terms such as the ‘Fear Gauge’ or ‘Fear Index’. For investors, the VIX index provides an efficient method to judge market risk, fear and uncertainty when making trading decisions.

CBOE’s volatility index was designed to measure the market’s expectations of volatility; it achieves this by using option prices from the S&P 500. By judging how far the put and call prices are distributed from the current price of the S&P 500, the volatility index draws an average, which is represented by VIX’s current price.

Most indexes are calculated based on stock prices, but the VIX volatility index is instead based on the S&P 500’s option prices. The calculations are complicated, but result in a measure of market outlook and volatility for the following 30 days.

The VIX cannot be directly traded, but many traders use exchange-traded funds (ETFs) or ETNs that are tied to the VIX to gain exposure to it. Additionally, besides trading the VIX, many investors have adopted it as a useful say on market volatility. It is also used as the backbone to many products that are based on volatility indexes.

Although the VIX index cannot be directly traded on, several indexes track the VIX index and can be traded on. When trading with us, you can access the ProShares VIX Short-Term Futures ETF, which is a popular ETF that provides exposure to the S&P 500 VIX Short-Term Futures Index. This index measures the returns of a portfolio of monthly VIX futures contracts with a weighted average of one month to expiration.

The ProShares VIX Short-Term Futures ETF is designed for advanced investors who wish to profit from the S&P 500’s volatility. This volatility is measured by the prices of VIX futures contracts. Intended for short term leveraged trading, the ProShares VIX Short-Term Futures ETF can work as an effective hedging instrument to the S&P 500.

The VIX index fluctuated during the coronavirus crisis to levels that had not been since the financial crisis of 2008. This resulted in a number of ETFs and ETNs that track the VIX index to jump wildly in price. Some of these indexes were leveraged, resulting in even sharper fluctuations and providing riskier opportunities for profits and losses.

During March 2020, the VIX index — which charts the 30-day implied volatility of the S&P 500 based on index options — went above $82, an all time-record that exceeded the $80.86 recorded in late 2008. In the days that have followed however the index dipped reaching a level of 56.14 one month later.

Despite the recent dip, for those searching for volatility, the index has generated many opportunities during the coronavirus pandemic. Furthermore, the iPath S&P 500 VIX Short-Term Futures ETN [VXX] — designed to offer exposure to VIX futures contracts — rose by 391% from the 20th February to the 18th March, before dropping again.

For those interested in volatility trading with a higher appetite for risk and who want even greater exposure to the index, the ProShares Ultra VIX Short-Term Futures [UVXY] grew by more than 880% over the same three-week period. This ETF provides leveraged exposure to the S&P 500 VIX Short-Term Futures Index.

Furthermore, since the start of the year, the VelocityShares Daily 2x VIX Short-Term ETN [TVIX] — which provides a two-times leveraged exposure to an index comprised of first- and second-month VIX futures positions — has climbed 664% since the start of the year, according to Reuters, peaking at the 806 level on the 18th March, up 1712% YTD at that point.

When market fear is high, so is the price of the VIX index. Whereas, a lower VIX can be a sign of either greed or investor complacency. Using the VIX alongside other measures of volatility and market outlook can help to provide crucial clues into current investor sentiment and an indexes outlook. Finally, the VIX volatility index is just a single model of volatility. Combining multiple models and inputs in your trading can provide you with less risk exposure when compared to betting on a single variable. Learn more about volatility trading.