Fund managers create portfolios that mirror the makeup of their target index with a goal of duplicating its performance. For example, an S&P 500 index fund would own the stocks included in the index and attempt to match the overall performance of the S&P 500. However, the VIX can be traded through futures contracts, exchange-traded funds (ETFs), and exchange-traded notes (ETNs) that own these futures contracts. Also known as the “Fear Index,” the Volatility Index (VIX) is a contrarian sentiment indicator that helps to determine when there is too much optimism or fear in the market. The market typically reverses course when sentiment reaches one extreme or the other. Investors may use the VIX to hedge against market downturns or to speculate on future market volatility.

Certain custody and other services are provided by JPMorgan Chase Bank, N.A. JPMS, CIA and JPMCB are affiliated companies under the common control of JPMorgan Chase & Co. Morgan Securities LLC (JPMS), a registered broker-dealer and investment adviser, member FINRA and SIPC.

It’s often called “the fear gauge,” since higher volatility is linked with higher uncertainty among investors. The index was created by the Chicago Board Options Exchange (aka Cboe, pronounced see-boh), which is a trading exchange like the New York Stock Exchange that’s focused on options contracts. There’s no crystal ball for the stock market, but there are indexes that help investors gauge expected risk. It can offer a sense of future volatility, or how bumpy things could get, for the US stock market over the next 30 days. Learn how the VIX works, how it’s calculated, and what a high or low VIX could mean for your investments. Unlike historical volatility, which looks at past market movements, the VIX is forward-looking.

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. The VIX rises because of increased demand for puts but also swells because the demand for put options increases, which will cause the IV to rise. 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.

Q. Is the VIX a leading or lagging indicator?

Yes, investors often use the VIX as a hedge against other portfolio assets, speculating on or mitigating the impact of volatility. VIX futures are derivatives based on the VIX Index, allowing investors to trade on future volatility expectations. This material is not financial or tax advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security. Forward looking statements cannot be guaranteed and all calculations may change due to changes in facts and circumstances.

What the VIX reveals about the market’s future

A VIX reading of 20 might be considered high during a calm bull market but relatively low during periods of economic uncertainty. 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). In this article, we’ll demystify the VIX Index by exploring its historical significance, how it’s calculated, and its practical applications.

By the end, you’ll have a solid grasp of how the VIX can be integrated into your investment strategy to better manage market risks and potentially capitalize on market movements. Cboe uses a complex calculation to arrive at the VIX—a number that changes in real-time throughout the day like stock and other index prices. The calculation takes into account the real-time average prices between the bid and ask for options with various future expiration dates.

Manage Portfolio Volatility

An index fund is a type of mutual fund that aims to duplicate the performance of a financial market index, like the S&P 500. This strategy is called passive management—instead of trying to actively beat a benchmark, an index fund aims to be the benchmark. All qualifying options need valid bid and ask prices to show market views on which strike prices will be met before expiry. Before we address the VIX, we should understand that volatility simply refers to the rate and magnitude of price changes. Understanding this is helpful—just as the VIX’s contrary nature can help options investors make better decisions. Even after the extreme bearishness of 2008 to 2009, the VIX moved back to that normal range.

• VIX values below 20 generally correspond to stable, stress-free periods in the markets.
• Information presented on these webpages is not intended to provide, and should not be relied on for tax, legal and accounting advice.
• Investors use the VIX to gauge market sentiment, manage risk, and inform trading and hedging strategies, especially in options trading.
• Market indexes use what are called weighting strategies to give appropriate representation to their underlying assets, and the choice of strategy can have a big impact on how an index fund performs.
• Market indexes make it simple to understand whether the stock market as a whole is gaining ground or losing value.

There are many financial products linked to the VIX, including ETFs and mutual funds, allowing investors to gain exposure to volatility. Below, we explore how the VIX is used as a contrary market indicator, how it measures institutional sentiment, and why an understanding of the VIX tends to favor specific strategies over others. 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. Insurance products are made available through Chase Insurance Agency, Inc. (CIA), a licensed insurance agency, doing business as Chase Insurance Agency Services, Inc. in Florida.

How to use the VIX to make better investment decisions

Yes, there are several ETFs and ETNs designed to track VIX futures, offering exposure to volatility without directly trading options or futures. You should understand your overall investing goals before you choose an index fund. Do you want to generate predictable income as you head into retirement? A price-weighted index takes into account each asset’s market price. Higher-priced assets have a bigger share in the index than lower-priced assets. The DJIA is a price-weighted index, since the price per share of each component stock determines its weighting in the index.

Essentially, the VIX index is a forward-looking measure of how much the market expects the S&P 500 to fluctuate over the next 30 days, expressed as an annualized percentage. Throughout its existence, the VIX has served as an invaluable witness to major market events. During the 1987 Black Monday crash, estimates suggest the index would have reached approximately 150 had it existed then. More recently, it hit dramatic peaks of 89.53 during the 2008 Financial Crisis and 82.69 amid the 2020 COVID-19 market crash. In normal market conditions, the VIX typically oscillates between 15 and 20, with readings above 30 signaling significant market stress.

• A VIX of above 20 could be considered high, but it can potentially go much higher.
• Such volatility, as implied by or inferred from market prices, is called forward-looking implied volatility (IV).
• Understanding VIX levels, particularly those above 30, which indicate high market volatility, can guide investors in hedging strategies and pricing derivatives.

Such volatility, as implied by or inferred from market prices, is called forward-looking implied volatility (IV). The index is more commonly mba asap finance guide known by its ticker symbol and is often referred to simply as “the VIX.” It was created by the CBOE Options Exchange and is maintained by CBOE Global Markets. It is an important index in the world of trading and investment because it provides a quantifiable measure of market risk and investors’ sentiments.

Understanding the CBOE Volatility Index (VIX) in Investing

Following the popularity of the VIX, the CBOE now offers several other variants for measuring broad market volatility. As a rule of thumb, VIX values greater than 30 are generally linked to significant volatility resulting from increased uncertainty, risk, and investors’ fear. VIX values below 20 generally correspond to stable, stress-free periods in the markets. It then started using a wider set of options based on the broader S&P 500 Index, an expansion that allows for a more accurate view of investors’ expectations of future market volatility. A methodology was adopted that remains in effect and is also used for calculating various other variants of the volatility index.

These products often behave quite differently from the underlying index due to factors like contango, backwardation, and their own structural characteristics. The complex nature of these derivatives means their returns can significantly deviate from what investors might expect based on VIX movements alone. Some investors fall into the trap of using the VIX as a precise timing mechanism for market entries and exits. High VIX readings don’t automatically signal market bottoms, nor do low readings immediately precede tops.

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. Generally, the higher the VIX (as a result of increased options demand and thus prices), the less certainty investors have about future prices in the US stock market over the next 30 days. The lower the VIX (due to the lower relative options demand and prices), the more certainty investors may feel they have about US stock market prices over the next 30 days.

Such VIX-linked instruments allow pure volatility exposure and have created a new asset class. Since the VIX is the IV of S&P 500 Index options, these options have such high strike prices, and the premiums are so expensive that very few retail investors are willing to use them. Usually, retail option investors will opt for a less costly substitute like an option on the SPDR S&P 500 ETF Trust (SPY), an exchange-traded fund that tracks the S&P 500 Index. If institutions are bearish, they will likely buy puts as a form of portfolio insurance. Rather than tracking past market performance, the VIX provides a snapshot of expected future volatility.