This may influence which products we review and write about (and where those products appear on the site), but it in no way affects our recommendations or advice, which are grounded in thousands of hours of research. Our partners cannot pay us to guarantee favorable how to update phone number reviews of their products or services. Miranda Marquit has been covering personal finance, investing and business topics for almost 15 years.

However, the index is far from perfect, and investors should consider how much weight they want to peg on it. The VIX is considered a reflection of investor sentiment, but one must remember that it is supposed to be a leading indicator. In other words, it should not be construed as a sign of an immediate market movement. Before investing in any VIX exchange-traded products, you should understand some of the issues that can come with them.

Cboe Volatility Index (VIX): What is it and how is it measured?

A final settlement value for VIX futures and VIX options is revealed on the morning of their expiration date (usually a Wednesday). This is calculated through a Special Opening Quotation (“SOQ”) of the VIX Index. Although the prices of Volatility Derivatives are linked to SPX options, individually, their valuations expire at various points along the term structure. In the last month, major stock indexes like the S&P 500 have been pulled downward as a result of disappointing earnings reports from big tech stocks. If you’ve been following financial news, you may have heard the word “volatility” being thrown around a lot — and you may have heard a reference to a volatility measurement called the VIX.

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The formula used by Cboe to calculate the price of VIX is rather complex, and the price of VIX is updated live during trading hours every 15 seconds. To spare you the math headache involved with calculating the price, let’s look instead at the data used to calculate it. The VIX index is specifically measuring expected volatility for another index, the S&P 500. True to its name, the S&P 500 index is composed of 500 of the largest publicly traded companies in the U.S.

The VIX attempts to measure the magnitude of price movements of the S&P 500 (i.e., its volatility). The more dramatic the price swings are in the index, the higher the level of volatility, and vice versa. Market data provided is at least 10-minutes delayed and hosted by Barchart Solutions. VIX Futures are traded on the CBOE Futures Exchange (CFE), while VIX options are traded on the CBOE Options. Both standard and weekly Volatility Derivatives can be bought on either exchange. The CBOE Volatility Index is calculated using standard SPX options and weekly SPX options with Friday expirations.

1. Both standard and weekly Volatility Derivatives can be bought on either exchange.
2. Specifically, the expected volatility implied by SPX option prices tends to trade at a premium relative to subsequent realized volatility in the S&P 500 Index.
3. The most significant words in that description are expected and the next 30 days.
4. VIX values are quoted in percentage points and are supposed to predict the stock price movement in the S&P 500 over the following 30 days.
5. The strike range of an SOQ calculation also differs from that of the VIX Index calculation at other times.

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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. To determine the strike range of the SOQ calculation, options with consecutive strikes do not have to have zero bid prices, which they do in calculating the VIX Index at other times. The VIX offers a window into the state of volatility in the markets, which can help investors gauge the level of fear, risk, or stress in the market. Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors.

However, the S&P 500 was busy scaling all-time highs during that time frame. The most significant words in that description are expected and the next 30 days. The predictive nature of the VIX makes it a measure of implied volatility, not one that is based on historical data or statistical analysis. The time period of the prediction also narrows the outlook to the near term. The CBOE Volatility Index (VIX) is a measure of expected price fluctuations in the S&P 500 Index options over the next 30 days. The VIX, often referred to as the “fear index,” is calculated in real time by the Chicago Board Options Exchange (CBOE).

How Does the VIX Measure Market Volatility?

The VIX index tracks the tendency of the S&P 500 to move away from and then revert to the mean. 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.

These change on a minute-by-minute basis, so it can’t be bought by stock market investors or traders. As the range of strike prices for puts and calls on the S&P 500 increases, it indicates that the investors placing the options trades are predicting some price movement up or down. Typically, the performance of the VIX index and the S&P 500 are inversely related to each other. In other words, when the price of VIX is going up, the price of the S&P 500 is usually heading south.

While we strive to provide a wide range of offers, Bankrate does not include information about every financial or credit product or service. Prices are weighted to gauge whether investors believe the S&P 500 index will be gaining ground or losing value over the near term. The VIX, formally known as the Chicago Board Options Exchange (CBOE) Volatility Index, measures how much volatility professional investors think the xtb cfd and forex broker review 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. The CBOE Volatility Index (VIX) quantifies market expectations of volatility, providing investors and traders with insight into market sentiment.

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In 2014, the VIX was enhanced once again to include a series of SPX Weeklys. A third of all SPX options traded are Weeklys, at close Trading oco to 350k contracts a day. This update ensured a new level of precision in matching the 30-day timeframe the VIX represents.

During its origin in 1993, VIX was calculated as a weighted measure of the implied volatility of eight S&P 100 at-the-money put and call options, when the derivatives market had limited activity and was in its growing stages. All such qualifying options should have valid nonzero bid and ask prices that represent the market perception of which options’ strike prices will be hit by the underlying stocks during the remaining time to expiry. “When the VIX is low, look out below!” tells us that the market is about to fall and that implied volatility is going to ramp up. When implied volatility is expected to rise, an optimal bearish options strategy is to be delta negative and vega positive (i.e., long puts would be the best strategy). There are many financial products linked to the VIX, including ETFs and mutual funds, allowing investors to gain exposure to volatility. The VIX is calculated by using the midpoint of the real-time bid/ask quotations of SPX options.

Traders making bets through options of such high beta stocks utilize the VIX volatility values in appropriate proportion to correctly price their options trades. The VIX has paved the way for using volatility as a tradable asset, albeit through derivative products. CBOE launched the first VIX-based exchange-traded futures contract in March 2004, followed by the launch of VIX options in February 2006.

In addition to being an index to measure volatility, traders can also trade VIX futures, options, and ETFs to hedge or speculate on volatility changes in the index. Extrinsic value consists of the time value, the premium paid until expiration, and implied volatility (IV), which is how much (more or less) an option premium swells or shrinks, depending on the supply and demand for options. Investors have attempted to measure and follow large market players and institutions in the equity markets for over 100 years. Following the flow of funds from these giant pipelines can be essential to investing success. 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.