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). The higher the VIX, the greater the level of fear and uncertainty in the market, with levels above 30 indicating tremendous uncertainty. Active traders who employ their own trading strategies and advanced algorithms use VIX values to price the derivatives, which are based on stocks with high beta. Beta represents how much a particular stock price can move with respect to the activity of the broader market index.

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It provides a real-time snapshot of investor sentiment and expected market volatility, offering valuable context to guide financial decisions. But it’s just one tool in making smart investment decisions for your financial future. Unlike historical volatility, which looks at past market movements, the VIX is forward-looking. It represents implied volatility, or the market’s forecast of future movement. This predictive nature makes the VIX a powerful volatility forecasting tool.

• She holds a Bachelor of Science in Finance degree from Bridgewater State University and helps develop content strategies.
• 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.
• This predictive nature makes the VIX a powerful volatility forecasting tool.
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• While the index isn’t tradable, investors can engage with VIX-linked products such as futures, options, ETFs, and ETNs to leverage its movements.

Does the Level of the VIX Affect Option Premiums and Prices?

Before trading options, please read Characteristics and Risks of Standardized Options. Supporting documentation for any claims, if applicable, will be furnished upon request. The VIX has paved the way for using volatility as a tradable asset, albeit through derivative products.

In reality, the VIX simply measures expected volatility – the magnitude of potential price movements – Accumulation distribution indicator without indicating direction. A high VIX reading doesn’t necessarily mean stocks will fall, just as a low reading doesn’t guarantee market stability. The index merely tells us how much movement investors expect, whether up or down. Imagine the stock market has been steadily climbing for months, and the VIX index is hovering around 12.

The Dow Turns Higher. Stock Market Breadth Is Improving.

The CBOE Volatility Index (VIX), often referred to as the “Fear Index,” provides a benchmark for the market’s future volatility expectations. It is a critical tool for investors and traders to assess market risk and sentiment, helping them make informed decisions. As the VIX tends to rise when markets decline and fall when they advance, it serves as an inverse indicator of market trends.

Myth #3: The VIX as a Perfect Market Timing Tool

These prices reflect how much investors are willing to pay for protection against market swings. When uncertainty increases, the demand for options increases—and so do their premiums—leading to a higher VIX. Options trading entails significant risk and is not appropriate for all investors. Certain complex options strategies carry additional risk.

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The VIX is often called the “fear gauge” because it tends to rise when market uncertainty and fear increase, reflecting higher expected volatility. 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.

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• Perhaps the most costly misconception involves VIX-based investment products.
• It’s based on the “implied volatility” baked into those options’ prices, basically, the market’s guess at how wildly the S&P 500 might move in the near future.
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• The VIX reading is both a manifestation of this frenzy and a driver as the VIX is often used as proof that markets are unstable.

Tech Jitters Weigh on U.S. Stock Futures, Asian Indexes

Also called the “fear index,” the VIX was created in 1993 by the Chicago Board Options Exchange and is formally known as the CBOE Volatility Index. “Chase Private Client” is the brand name for a banking and investment product and service offering, requiring a Chase Private Client Checking℠ account. Our calculators are here to help you analyze your numbers and ensure you’re on the path to meeting your financial goals.

Traders making bets through options of such high beta stocks utilize the VIX volatility values in proportion to correctly price their options trades. Following the popularity of the VIX, the CBOE now offers several other variants for measuring broad market volatility. Created by the Chicago Board Options Exchange (CBOE), the VIX gives a number that shows how much the S&P 500 index might swing in the coming month.

In many cases, when the stock market goes down in price, the VIX increases. That said, the VIX is intended to measure short-term volatility rather than act as an index that’s always moving the opposite way as stock prices. The VIX is an important barometer of market volatility and investor sentiment. Derived from S&P 500 options, it offers a snapshot of how fearful or complacent traders are feeling. From managing risk to trading options, the VIX has become a must-watch indicator for anyone serious about the markets. Known as the market’s “fear gauge,” the VIX often spikes during times of uncertainty and investor anxiety.

Investors use the VIX to gauge market sentiment, manage risk, and inform trading and hedging strategies, especially in options trading. 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. There’s more to it, but basically, the VIX is calculated as the square root of the expectation of price changes in the S&P 500 over the next 30 days. The VIX measures the market’s expectations for volatility over the next 30 days based on the bid and ask prices of S&P 500 index options (called the SPX options). For instance, a stock with a beta of +1.5 indicates that it is theoretically 50% more volatile than the market.

She holds a Bachelor of Science in Finance degree from Bridgewater State University and helps develop content strategies.

The VIX isn’t about predicting which way the market will go, it’s about how much it might move. When the VIX is high, it means investors expect big swings and there’s a lot of nervousness. Yes, investors often use the VIX as a hedge against other portfolio assets, speculating on or mitigating the impact of volatility. Chase’s website and/or mobile terms, privacy and security policies don’t apply to the site or app you’re about to visit. Please review its terms, privacy and security policies to see how they apply to you. Chase isn’t responsible for (and doesn’t provide) any products, services or content at this third-party site or app, except for products and services that explicitly carry the Chase name.

When investors anticipate significant price swings, option premiums tend to increase, which then drives the VIX higher. 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. The VIX tends to have an inverse relationship with the S&P 500’s price.