Understanding how the VIX works and what it’s saying can help short-term traders tweak their portfolios and get a feel for where the market is headed. Generally speaking, implied volatility is expected to rise during times of heightened fear or uncertainty regarding the short-term direction of the market, whereas lower IV is correlated with investor complacency and positive price action for equities. The Cboe Volatility Index – frequently referred to by its ticker symbol, VIX – is a real-time measure of implied volatility on the benchmark S&P 500 Index (SPX). Not only is the VIX used as a quick gauge of short-term investor sentiment, it’s also the basis of many active investing strategies, from portfolio hedging to directional speculation. Large institutional investors hedge their portfolios using S&P 500 options to position themselves as winners whether the market goes up or down, and the VIX index follows these trades to gauge market volatility.
One of the most popular and accessible of these is the ProShares VIX Short-Term Futures ETF (VIXY), which is based on VIX futures contracts with a 30-day maturity. Some exchange-traded securities let you speculate on implied volatility up to six months in the future, such as the iPath S&P 500 VIX Mid-Term Futures ETN (VXZ), which invests in VIX futures with four- to seven-month maturities. Cboe lists options contracts that derive their value from short-term VIX futures, and call options on VIX can be used to hedge equity portfolios in the expectation that VIX and stocks will continue to diverge over time. VIX calls and puts can also be used to bet on directional moves in the index itself, though traders should be aware of the unique expiry and settlement rules pertaining to VIX options. The VIX volatility index offers insight into how financial professionals are feeling about near-term market conditions.
The VIX is typically used to measure short-term investor sentiment, but many also use the index as a foundation for active investing strategies. You might consider shifting some of your portfolio to assets thought to be less risky, like bonds or money market funds. Alternatively, you could adjust your asset allocation to cash in recent gains and set aside funds during a down market.
Making Investment Decisions Based on the VIX
Some of the more popular and active of these include the iPath Series B S&P 500 VIX Short Term Futures ETN (VXX), the ProShares Ultra VIX Short-Term Futures ETF (UVXY), and the Short VIX Short-Term Futures ETF (SVXY). Given the differing factors driving the day-to-day action in each index, VIX and SPX are generally expected to maintain an inverse correlation with one another. As such, many analysts and market watchers track the VIX as a contemporaneous indicator of investor sentiment, and it’s often referred to casually as the “fear index” https://www.forex-world.net/ or “fear gauge.” Perhaps the most straightforward way to invest in the VIX is with exchange-traded funds (ETFs) and exchange-traded notes (ETNs) based on VIX futures. As exchange-traded products, you can buy and sell these securities like stocks, greatly simplifying your VIX investing strategy. The real-time VIX values quoted in the financial media (aka the “spot VIX” or “cash VIX”) should be regarded as statistics – and in light of this, VIX has no publicly listed shares and cannot be traded directly in the same way as a company’s stock.
The VIX is one the main indicators for understanding when the market is possibly headed for a big move up or down or when it may be ready to quiet down after a period of volatility. VIX is at a current level of 13.49, up from 13.11 the previous market day and down from 18.49 one year ago. Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more – straight to your e-mail.
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Generally speaking, if the VIX index is at 12 or lower, the market is considered to be in a period of low volatility. When you see the VIX above 30, that’s sometimes viewed as an indication that markets are very unsettled. Her analysis has been featured on CNBC, published in Forbes and SFO Magazine, syndicated to Yahoo Finance and MSN, and quoted in Barron’s, The Wall Street Journal, and USA Today. Market professionals rely on a wide variety of data sources and tools to stay on top of the market.
- Some exchange-traded securities let you speculate on implied volatility up to six months in the future, such as the iPath S&P 500 VIX Mid-Term Futures ETN (VXZ), which invests in VIX futures with four- to seven-month maturities.
- When the stock markets appear relatively calm but the VIX index spikes higher, professionals are betting that prices on the S&P 500—and thereby the stock market as a whole—may be moving higher or lower in the near term.
- For people watching the VIX index, it’s understood that the S&P 500 stands in for “the stock market” or “the market” as a whole.
- Alternatively, you could adjust your asset allocation to cash in recent gains and set aside funds during a down market.
- Large institutional investors hedge their portfolios using S&P 500 options to position themselves as winners whether the market goes up or down, and the VIX index follows these trades to gauge market volatility.
- As exchange-traded products, you can buy and sell these securities like stocks, greatly simplifying your VIX investing strategy.
There are a range of different securities based on the CBOE Volatility Index that provide investors with exposure to the VIX. For people watching the VIX index, it’s understood that the S&P 500 stands in for “the stock market” or “the market” as a whole. When the VIX index moves higher, this reflects the fact that professional investors are responding to more price volatility in the S&P 500 in particular and https://www.currency-trading.org/ markets more generally. When the VIX declines, investors are betting there will be smaller price moves up or down in the S&P 500, which implies calmer markets and less uncertainty. In addition to VIX options, various VIX-based exchange-traded products (ETPs) exist that track the price action of the index itself and/or some combination of its futures – whether directly, inversely or in a leveraged manner.
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The VIX, formally known as the Chicago Board Options Exchange (CBOE) Volatility Index, measures how much volatility professional investors think the S&P 500 index will experience over the next 30 days. Market professionals refer to this as “implied volatility”—implied because the VIX tracks the options market, where traders make bets about the future performance of different securities and market indices, such as the S&P 500. When the stock markets appear relatively calm but the VIX index spikes higher, professionals are betting that prices on the S&P 500—and thereby the stock market as a whole—may be moving higher or lower in the near term.
When the VIX moves lower, investors may view this as a sign the index is reverting to the mean, with the period of greater volatility soon to end. Prices are weighted to gauge whether investors believe the S&P 500 index will be gaining ground or losing value over the near term. Just keep in mind that with investing, there’s no way to predict future stock market performance or time the market. The VIX is merely a suggestion, and it’s been proven to be wrong about the future direction of markets nearly as often as it’s been right. That’s why most everyday investors are best served by regularly investing in diversified, low-cost index funds and letting dollar-cost averaging smooth out any pricing swings over the long term.
If prices gain a great deal very quickly, or fall very far, very rapidly, the principle of mean reversion suggests they should snap back to their long-term average before long. Miranda Marquit has been covering personal finance, investing and business topics for almost 15 years. She has contributed to numerous outlets, including NPR, Marketwatch, U.S. News & World Report and HuffPost. Miranda is completing her MBA and lives in Idaho, where she enjoys spending time with her son playing board games, travel and the outdoors.
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That said, there are plenty of VIX derivatives and exchange-traded products available for those looking to add long or short volatility exposure to their portfolios. The current version of VIX, which has been in popular use since 2003, offers a more comprehensive https://www.forexbox.info/ look at options IV by considering a range of near-the-money call and put strikes on the broader S&P 500. Specifically, intraday VIX quotes are calculated from a basket of short-term SPX options that are weighted to maintain a constant average maturity of 30 days.
It’s important to note here that while volatility can have negative connotations, like greater risk, more stress, deeper uncertainty or bigger market declines, volatility itself is a neutral term. Greater volatility means that an index or security is seeing bigger price changes—higher or lower—over shorter periods of time. On the other hand, during times when the VIX is falling, indicating the possibility of more stability to come in the stock market, it might make more sense to focus on individual stocks or other riskier assets that might fare well during times of growth. Before investing in any VIX exchange-traded products, you should understand some of the issues that can come with them. Certain VIX-based ETNs and ETFs have less liquidity than you’d expect from more familiar exchange traded securities. ETNs in particular can be less liquid and more difficult to trade as well as may carry higher fees.
First introduced by the Chicago Board Options Exchange (Cboe) in 1993, the initial version of the VIX reflected a rolling 30-day calculation of at-the-money implied volatility (IV) on S&P 100 Index (OEX) options. This calculation is no longer widely used or tracked, but the “old VIX” is still available under the ticker symbol VXO. In finance, mean reversion is a key principle that suggests asset prices generally remain close to their long-term averages.