VIX (Volatility Index)
Quick Definition
The CBOE Volatility Index, often called the "fear gauge," which measures the market's expectation of 30-day volatility based on S&P 500 options prices.
What Is VIX (Volatility Index)?
The VIX (ticker: ^VIX) is calculated by the Chicago Board Options Exchange (CBOE) using the prices of near-term S&P 500 index options. It represents the market's expectation of annualized volatility over the next 30 days, expressed as a percentage. A VIX reading of 20 implies that the market expects the S&P 500 to move within a roughly 20% annualized range (about 1.2% per day). Historically, the VIX averages around 19-20 and tends to spike above 30-40 during market crises (it reached 82.69 during the 2020 COVID crash and 80.86 during the 2008 financial crisis). The VIX exhibits mean-reverting behavior and tends to rise sharply during sell-offs because put demand surges. Traders can access VIX exposure through futures, options on VIX, and VIX-linked ETPs, though these instruments are based on VIX futures rather than the spot VIX and can behave differently due to contango and backwardation. The VIX is widely used for portfolio hedging, sentiment analysis, and volatility trading.
VIX (Volatility Index) Example
- 1A VIX reading of 12 indicates extreme complacency, suggesting options prices are cheap and the market expects minimal turbulence
- 2During the March 2020 pandemic crash, the VIX surged from 14 to over 82 in just weeks as panic-driven put buying exploded S&P 500 options premiums
Related Terms
Implied Volatility (IV)
The market's forecast of the likely magnitude of future price movements, derived from current option prices using pricing models.
Volatility Skew
The pattern where implied volatility differs across options with the same expiration but different strike prices.
Options Greeks
A set of risk measures (delta, gamma, theta, vega, rho) that quantify how an option's price responds to changes in various market factors.
Call Option
A contract giving the holder the right, but not the obligation, to buy an underlying asset at a specified price within a specified time period.
Put Option
A contract giving the holder the right, but not the obligation, to sell an underlying asset at a specified price within a specified time period.
Strike Price
The predetermined price at which the holder of an option can buy (call) or sell (put) the underlying asset upon exercise.
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