While the VIX itself is an index and cannot be traded, there are funds and notes investors and traders can participate in to gain exposure to the index. The CBOE Volatility Index (VIX) is a real-time index that represents the market’s expectations for the relative strength of near-term price changes of the S&P 500 Index (SPX). Because it is derived from the prices of SPX index options with near-term expiration dates, it generates a 30-day forward projection of volatility. Volatility, or how fast prices change, is often seen as a way to gauge market sentiment, and in particular the degree of fear among market participants.
ProShares Short VIX Short-Term Futures ETF (SVXY)
Unlike the three previous ETFs, the ProShares Short VIX Short-Term Futures ETF (SVXY 5.1%) is for investors looking to profit from falling volatility. It tracks the S&P 500 VIX Short-Term Futures Index, which includes near-term contracts, but it does so inversely at 0.5x (50%) exposure. That means when short-term VIX futures fall, this ETF rises at half the inverse rate net of fees.
- There are a range of different securities based on the CBOE Volatility Index that provide investors with exposure to the VIX.
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- 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.
- The VIX measures expected volatility over the next 30 days, while the three-month VIX reflects volatility expectations over the next 90 days, so the latter tends to be smoother and less reactive to short-term market events.
There are also nearly two-dozen volatility exchange-traded products (ETPs) for the VIX. This includes both exchange-traded funds (ETFs) that hold assets and exchange-traded notes (ETNs). Meanwhile, the IAI, which also has proven to be a leading indicator to the VIX, has shown some divergence. During the time period mentioned above, despite some concerns about the market, the overall IAI actually moved lower.
What is the Chicago Board Options Exchange (CBOE) Volatility Index?
The second method, which the VIX uses, involves inferring its value as implied by options prices. Options are derivative instruments whose price depends upon the probability of a particular stock’s current price moving enough to reach a particular level (called the strike price or exercise price). In ifc markets review 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.
These funds use derivatives like VIX futures to either bet on or against volatility. Some are designed to spike when markets panic, while others benefit when volatility trends low. It’s crucial to read the fine print because VIX ETFs are known for unpredictable behavior over time, sharp drawdowns, and complicated tax treatment. The VIX is considered a reflection of investor sentiment and has in the past been a leading indicator of a dip in the S&P 500, but that relationship may have changed in recent times.
A highly volatile security can see its price change dramatically in either direction over a short period of time. On the other hand, a security with low volatility will tend to hold its price over time. Sentiment plays a big role in decision making for the stock markets, and to that extent, it could be a good idea to glance at the VIX. However, the index is far from perfect, and investors should consider how much weight they want to peg on it.
Go long too long, and contango, mean reversion, and high fees will slowly bleed your returns. Go short too long, and online marketing trading you may enjoy a winning streak until one bad volatility spike wipes out a big chunk of gains or more. Learn about stock volatility and which stock market sectors are the most volatile right now. The -1x Short VIX Futures ETF (SVIX 9.9%), offered by Volatility Shares, provides full -1x inverse exposure to the S&P 500 VIX Short-Term Futures Index, unlike ProShares’ more tempered 0.5x exposure.
Most Volatile Stocks in 2025
Experts understand what the VIX is telling them through the inside bar lens of mean reversion. In finance, mean reversion is a key principle that suggests asset prices generally remain close to their long-term averages. 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.
Because of this, this ETF amplifies the benefits of contango and mean reversion. In calm markets, it can steadily appreciate as volatility trends lower and VIX futures decay. However, it also comes with significantly more downside risk, as any sharp rise in VIX futures or the spot VIX can lead to steep, rapid losses.
- The Chicago Board Option Exchange(CBOE) Volatility Index was introduced by Cboe Global Markets, Incorporated (Cboe) in 1993.
- The appeal here lies in how volatility tends to revert to the mean, and how contango erodes the value of VIX futures.
- The VIX Index, also known as the Fear Index or the Volatility Index, represents the market’s expectation of future volatility.
- They all follow some version of VIX futures, which are correlated to the spot VIX but can behave very differently depending on which contracts are tracked and the shape of the VIX futures curve.
- 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 markets more generally.
Making Investment Decisions Based on the VIX
The performance of the VIX is inversely related to the S&P 500 – when the price of the VIX goes up, the price of the S&P 500 usually goes down. While the VIX only measures the volatility of the S&P 500 Index, it has become a benchmark for the U.S. stock market. Although the VIX revealed high levels of investor anxiety, the Investopedia Anxiety Index (IAI) remained neutral. The IAI is constructed by analyzing which topics generate the most reader interest at a given time and comparing that with actual events in the financial markets. 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. 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.
How Can an Investor Trade the VIX?
Higher VIX levels generally correlate with increased option premiums, while lower VIX levels lead to more affordable options. Like its short-term sibling, this ETF charges a 0.85% expense ratio and issues a K-1 form, which can complicate tax reporting and often arrives close to the deadline. This futures ETF still isn’t a set-and-forget hedge but may suit investors looking for less whiplash than the ProShares VIX Short-Term Futures ETF.
As with any investing vehicles, traders should carefully consider the stated goals, suggested holding periods and liquidity of these instruments. Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more – straight to your e-mail. 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.
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 serves as a valuable indicator of expected volatility and market sentiment. By monitoring the VIX, investors can gain insights into market risk, fear, and the actions of institutional players.
VIX vs. S&P 500 Price
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 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. Downside risk can be adequately hedged by buying put options, the price of which depends on market volatility.
It’s been a year of such extremes on Wall Street that even volatility measures have been historically volatile. When the VIX falls below 15, the market is less volatile, and very volatile at 40. The VIX around 9 is vulnerable to complacency, and at 40 the market could be bottoming. To help mitigate this, the Volatility Shares ETF maintains a hedging overlay using out-of-the-money VIX call options. These hedges are designed to limit the ETF’s worst-case losses, but they won’t fully protect against major volatility shocks. When the VIX is up it can mean that there is increased fear and risk in the market.