Trading term

What is VIX (volatility index)?

The VIX is a number the Cboe publishes for how much movement the options market expects in the S&P 500 over the next 30 days. It usually sits in the teens or low 20s and spikes past 50 when markets panic. It tells you how big a move traders are braced for. It says nothing about which way.

The VIX is built from the prices people are paying right now for S&P 500 options. When traders bid options up, the VIX rises. When options get cheap, it falls. Nobody sets it by hand. It's a calculation running off live option quotes all day.

The reading is an annualised percentage, and that's where most of the confusion starts. A VIX of 20 means the options market is pricing in roughly 20% of movement over the coming year. For a sense of the coming month, divide by about 3.5. So a VIX of 20 works out to a move of around 5.8% over the next 30 days, whichever direction it ends up going.

People call it the fear index because it climbs when everyone rushes to buy protection, and that rush usually comes while stocks are falling. The nickname works well enough as shorthand. What the number actually measures is the price of expected movement, and fear is just the most common reason that price goes up. The VIX has only closed above 80 in two stretches, the 2008 financial crisis and the March 2020 crash, and it has spent long calm spells under 12.

This is where the VIX parts company with standard deviation. Standard deviation looks backwards at returns that already landed. The VIX looks forwards at what traders will pay today for the next 30 days. That forward-looking version of volatility is called implied volatility, and the VIX is implied volatility for the whole S&P 500 rolled into one figure. It's a US index, and other markets publish their own: the VSTOXX covers Europe's Euro Stoxx 50, and there's an India VIX, among others.

For example

The VIX sits at 14 through a quiet few months, which prices in a move of about 4% over the next 30 days. Then a big lender fails over a weekend and by Monday afternoon the VIX is at 45. That's an expected move of about 13% over the coming month, roughly three times as wide. None of it tells you the S&P is heading down. It says the range of outcomes just got much bigger, and that anyone buying protection now pays several times what it cost on Friday.

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Why it matters to you

For a long-term investor the VIX isn't a signal to do anything. It's a thermometer. It tells you how much movement the market is braced for over the next month, which is a decent read on whether the swings in your own account are ordinary or unusual. It matters far more if you buy options, because the VIX is essentially their price tag. The same protective option costs several times more at 45 than it does at 14, so the insurance gets most expensive at exactly the moment you most want it.

⚠ A high VIX isn't a forecast that stocks will fall

There's no direction in the VIX. It's built from the expected size of a move, not its sign, so a reading of 45 says the next month could be wide either way. Some of the biggest up days in market history landed with the VIX in the 40s and 50s. The number is also an expectation rather than a measurement. It's what traders are willing to pay today, and they've been wrong plenty of times in both directions. On average the VIX has run a little above the movement that actually turned up, because people pay a premium for insurance.

Frequently asked questions

What is the VIX?

It's an index the Cboe calculates from S&P 500 option prices, showing how much movement the options market expects over the next 30 days. It's quoted as an annualised percentage, so a reading of 20 means about 20% of expected movement over a year, or roughly 5.8% over the coming month.

What is considered a high VIX reading?

Under 15 is calm, somewhere around 19 to 20 is close to its long-run average, and above 30 means the market is stressed. Above 50 is rare and usually means something has broken. The VIX has only ever closed above 80 in two stretches: the 2008 financial crisis and March 2020. Its record close is 82.69, on 16 March 2020.

Does a high VIX mean the market will go down?

No. There's no direction in the VIX at all. It measures how big a move the options market expects, not which way it goes. High readings do tend to show up while markets are falling, because that's when people buy protection, but the number itself fits a violent rally just as well.

Can you buy the VIX?

Not the index itself, because there's nothing to hold. There are VIX futures, options and exchange-traded products that track it, but those follow VIX futures rather than the index, and the two can drift a long way apart. Products like these can lose value over months even when the VIX finishes roughly where it started, which catches a lot of people out.

Read the full guide

Investing basicsWhat Is Volatility? Why Your Average Return Isn't What You GotVolatility measures how much returns bounce around their average. It also decides how much of that average you keep — a fund can average 8% a year and hand you far less.12 min read

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