VIX (Volatility Index)

The VIX (Volatility Index) is calculated from S&P 500 index option prices and measures the market's expectation of 30-day volatility. Often called the "fear index," the VIX rises when investors are anxious and falls when they're confident.

Formula

VIX = Implied Volatility of SPX Options

Calculated from a blend of near- and next-month put and call option prices. Higher option prices (larger premiums) indicate higher expected volatility.

Example

In normal markets, VIX is 15-20. During the COVID crash of March 2020, VIX spiked to 82, reflecting extreme fear. During the 2022 Fed rate hikes, VIX climbed to 36. In calm 2017, VIX averaged 11. You can trade VIX options and futures, or buy VXX (inverse leveraged bet on VIX decline).

How to Interpret It

• VIX 10-15: Low volatility; market is calm. Investors are confident.
• VIX 15-20: Normal volatility. Healthy market conditions.
• VIX 20-30: Elevated volatility; market is stressed or uncertain.
• VIX > 30: High fear. Possible panic selling or major news event.
• VIX spike: Often coincides with market corrections or black swan events (March 2020, October 1987).

Limitations

• VIX measures only S&P 500 implied volatility, not the broader market or individual stocks.
• VIX can diverge from realized volatility; high VIX doesn't always lead to large down moves.
• VIX reverting from spikes is common; buying after VIX spike can work well for contrarian traders.
• Options are priced with bid-ask spreads; VIX is an index, not directly tradeable (VXX is a proxy but imperfect).

Related Terms

• Volatility — actual price movement; VIX is an expectation of future volatility
• Options — VIX is calculated from index options
• Market Sentiment — VIX is a proxy for investor fear/confidence
• Implied Volatility — option prices' implied volatility expectation