The CBOE Volatility Index, also known as the VIX, is a financial index that measures the market’s expectation of volatility over the next 30 days. The index is created by the Chicago Board Options Exchange (CBOE) and is often referred to as the “fear index” because it is used as a gauge of investor sentiment and market volatility.
The VIX index is calculated using the prices of options contracts on the S&P 500 index” data-wpil-keyword-link=”linked”>S&P 500 index. Options contracts give the holder the right, but not the obligation, to buy or sell a specific asset at a specified price before a certain date. The prices of options contracts are used to estimate the level of volatility that investors expect in the market over the next 30 days.
The VIX index is expressed in percentage points and represents the expected annualized change in the S&P 500 index over the next 30 days. For example, a VIX reading of 20 means that the market is expected to move up or down by 20% over the next year, or about 1.4% over the next 30 days.
The VIX index is often used as a measure of market risk and volatility. When the index is high, it indicates that investors are expecting a high degree of uncertainty and potential volatility in the market. Conversely, when the index is low, it suggests that investors are expecting a period of relative calm and stability.
Investors and traders use the VIX index to make decisions about portfolio management and hedging strategies. For example, if the VIX index is high, an investor may choose to hedge their portfolio by buying options contracts or selling short positions in the market. Similarly, if the VIX index is low, an investor may choose to increase their exposure to the market by buying stocks or other assets.
The VIX index is not without its limitations, however. One criticism of the index is that it only measures the market’s expectation of volatility over the next 30 days, which means that it may not provide a complete picture of longer-term market trends. Additionally, the index only measures volatility in the US stock market and does not take into account volatility in other asset classes, such as currencies or commodities.
Despite these limitations, the CBOE Volatility Index remains an important tool for investors and traders who are looking to manage risk and make informed decisions about portfolio management. The index provides a measure of market sentiment and can be used as a guide to anticipate potential market moves and volatility.