Understanding the VIX

Cboe Global Markets revolutionized investing with the creation of the Cboe Volatility Index® (VIX® Index), the first benchmark index to measure the market’s expectation of future volatility. The VIX Index is based on options of the S&P 500® Index, considered the leading indicator of the broad U.S. stock market. The VIX Index is recognized as the world’s premier gauge of U.S. equity market volatility. ----- One of the most recognized measurements of expected equity volatility is the VIX Index. The Cboe Volatility Index, as it’s officially called, is widely reported by financial media as the benchmark of volatility. You’ll also hear financial news outlets refer to it as the “fear gauge” but for our purposes we’ll refer to it as the VIX Index. So, what is the VIX Index? Well, as its name implies, it’s an index. As a measurement tool, it is not a tradable product. The VIX Index indicates the degree or expected level of uncertainty in the marketplace. Specifically, the VIX Index measures thirty day expected volatility of the S&P 500 Index by using Cboe‐listed options on the S&P 500 Index as inputs – you may know these as SPX options. In math lingo, the VIX Index is expressed in percentage terms as an annualized one standard deviation move of returns on the S&P 500 Index. Let’s unpack that. The VIX Index calculation uses SPX option prices. The prices investors are willing to pay for options typically reflect how much the underlying asset—in this case the S&P 500—is expected to move over a given time frame. The key word here is “expected” – which, means the VIX Index is a forward-looking indicator of market volatility. Between 1990 and 2020, the closing range on the VIX Index has been between 9.14 and 82.69. Higher VIX Index values suggest more expected uncertainty being priced into the marketplace, while lower values indicate less expected uncertainty. Typically, the VIX Index has an inverse relationship to the S&P 500 Index. What does that mean? In most cases, when the S&P 500 Index goes up, the VIX Index goes down, and vice versa - but not always. Let’s take a look at how the VIX Index is used. It is most widely used as a gauge or indicator about the future levels of the market. It’s important to remember the VIX Index itself is not directly tradable. For more sophisticated investors seeking expected volatility exposure, Cboe lists tradable VIX futures and options. Let’s summarize what we’ve learned. • The VIX Index is calculated using S&P 500 Index option prices. • The VIX Index is a forward-looking indicator of expected stock market uncertainty. • A higher VIX Index level suggests greater collective uncertainty in the market and a lower VIX Index level suggests more certainty. • The VIX Index itself is not tradable. • Cboe lists VIX options and futures for investors seeking expected volatility exposure.