- The VIX (aka volatility index) is a measure of investors’ volatility expectations. High VIX values signal market fear, while low values indicate stability.
- Investors use the VIX to gauge market sentiment and as a tool for hedging against potential downturns.
- Several alternatives to the VIX provide insights into different market sectors or time frames, like the VXN, which measures volatility in the Nasdaq 100 index.
The VIX explained
The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) is a widely recognized measure of stock market volatility. The VIX analyzes options on the S&P 500 Index to measure the market’s expectation of volatility over the next 30 days.
The VIX is sometimes called the “fear index” or “Wall Street’s fear gauge” as it reflects investors’ anxiety about the future – or, alternatively, their optimism. A higher VIX reading generally signals more fear or uncertainty, while a low VIX signals more stability or predictability.
Think of the VIX as a thermometer for the stock market’s stability. When uncertainty is high, like during downturns or in advance of major economic events, the VIX may spike.
How is the VIX calculated?
The VIX’s calculation is based on the prices of S&P 500 options.
Options can be seen to represent an investor’s estimate of where the S&P 500 will be in the near future. Call options (or calls) are expectations that the index will rise, while put options (or puts) expect that it will fall. The VIX aggregates the two to map the market’s collective expectation of 30-day volatility.
The VIX doesn’t quantify the expected direction of upcoming market movements, only the magnitude. In other words, it doesn’t say if stocks will rise or fall, just that they’re likely to move.
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How to use the VIX
The VIX isn’t a crystal ball. But it can still be useful for investors as an advance warning to prepare for potential market turbulence.
A high VIX reading (above 20–25) typically occurs amid downturns, geopolitical instability or other uncertainties. Investors will sometimes interpret a volatile reading as a signal to re-examine their risk levels and possibly hedge against a potential market drop.
A low VIX reading (below 15) on the other hand suggests a more stable market environment and confidence among investors. Some market observers consider a low VIX to be a green light for riskier or more aggressive investment strategies.
VIX alternatives
The VIX offers a broad view of market volatility, but there are several related indexes that provide more specific insights. These include:
- VIX9D: This index is essentially like the VIX but with a shorter focus. The VIX9D captures the market’s nine-day volatility expectations for the S&P 500. It’s beneficial for investors looking to gauge very short-term volatility in uncertain times.
- VXN: The VXN measures volatility within the tech-heavy Nasdaq 100. Tech stocks may react differently to certain forces than the broader market, so the VXN can be useful for investors looking to predict volatility specific to the tech sector.
- VXD: Similar to the VXN, the VXD reflects volatility expectations for only the Dow Jones Industrial Average, which tracks a group of 30 mega-cap stocks. This makes the VXD more useful to investors with portfolios centered on large, stable companies.
The bottom line
Markets can be hard to read. But the VIX can be a useful gauge of what could come next in terms of performance, based on investors’ anxieties.
Whether you’re evaluating risk in your portfolio or considering how to respond to broader market shifts, the VIX can be a valuable reference point. Speak with a J.P. Morgan advisor to help determine ways to hedge against volatility and incorporate the VIX into your individual investment strategy.
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