VIX Explained

Implied volatility typically increases when markets are turbulent or the economy is faltering. In contrast, if stock prices are rising and no dramatic changes seem probable, VIX tends to fall or remain steady at the lower end of its scale. VIX, in other words, is negatively correlated with stock performance. As a rule of thumb, VIX values greater than 30 are generally linked to large volatility resulting from increased uncertainty, risk, and investors’ fear. VIX values below 20 generally correspond to stable, stress-free periods in the markets.

• On our side, we price our cash Volatility Index (VIX) contracts in a different way to the rest of our cash index markets.
• The VIX takes a weighted average of all these options prices in the S&P 500 index and derives a single number that is called the VIX.
• Its steady fall lately means that stock returns over the next three months may be muted, according to Credit Suisse.
• Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism.
• Still, remember, trading volatility is not trading a market downturn, as it is possible for the market to decline but volatility remain low.

For the past several years, if the VIX was trading below 20 then the market was considered to be in a period of stability, while levels of 30 or more indicated high volatility. Still, remember, trading volatility is not trading a market downturn, as it is possible for the market to decline but volatility remain low. Volatility is a measure of the movement of an asset’s price, rather than the price of the asset. When you trade volatility, you aren’t focused on the direction of change, but on how much and how frequently the market has moved. Generally speaking, if the VIX index is at 12 or lower, the market is considered to be in a period of low volatility.

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Trading platforms

On our side, we price our cash Volatility Index (VIX) contracts in a different way to the rest of our cash index markets. Market professionals rely on a wide variety of data sources and tools to stay on top of the market. The VIX is one the main indicators for understanding when the market is possibly headed for a big move up or down or when it may be ready to quiet down after a period of volatility. The Bullish Bears team focuses on keeping things as simple as possible in our online trading courses and chat rooms. We provide our members with courses of all different trading levels and topics.

• This fund tracks the S&P 500 VIX Mid-Term Futures Index Total Return, providing exposure to a daily rolling long position in the fourth-, fifth-, sixth-, and seventh-month VIX futures contracts.
• If you were wrong, and volatility didn’t increase, your losses to your VIX position could be mitigated by gains to your existing trade.
• This may influence which products we review and write about (and where those products appear on the site), but it in no way affects our recommendations or advice, which are grounded in thousands of hours of research.
• Traders making bets through options of such high beta stocks utilize the VIX volatility values in appropriate proportion to correctly price their options trades.

When you’re ready you can join our chat rooms and access our Next Level training library. Our watch lists and alert signals are great for your trading education and learning experience. While volatility predicted by the VIX is probably priced in immediately by the market, the fact that the hypothesis que es stop loss was rejected indicates that not all the volatility is priced in immediately. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey.

Experts understand what the VIX is telling them through the 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. Just choose the course level that you’re most interested in and get started on the right path now.

What does the VIX tell us?

These ETFs are complex financial instruments that aren’t intended for beginners. Some of the more popular and active of these include the iPath Series B S&P 500 VIX Short Term Futures ETN (VXX), the ProShares Ultra VIX Short-Term Futures ETF (UVXY), and the Short VIX Short-Term Futures ETF (SVXY). Given the differing factors driving the day-to-day action in each index, VIX and SPX are generally expected to maintain an inverse correlation with one another.

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That said, there are plenty of VIX derivatives and exchange-traded products available for those looking to add long or short volatility exposure to their portfolios. The current version of VIX, which has been in popular use since 2003, offers a more comprehensive look at options IV by considering a range of near-the-money call and put strikes on the broader S&P 500. 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.

Below you’ll learn what S&P 500 options are, how the VIX is calculated and what its value means. Let’s say that you have a long position on the stock of a US company that was a constituent of the S&P 500. Although you believe it has long-term prospects, you want to reduce your exposure to some short-term volatility. You decide to open a position to buy the VIX with the expectation that volatility is going to increase. As an investor, if you see the VIX rising it could be a sign of volatility ahead. You might consider shifting some of your portfolio to assets thought to be less risky, like bonds or money market funds.

Examples of how investors use the volatility index

While most investors tend to trade VIX ETFs on a short-term basis, the best-performing VIX ETF over a trailing 12-month period is the iPath Series B S&P 500 VIX Mid-Term Futures ETN (VXZ). With the start of the pandemic in March 2020, market volatility reached is xm a brokerage firm we can truly trust its highest level in more than a decade. After moderating through the rest of that year and 2021, it increased again in the early stages of Russia’s invasion of Ukraine in 2022. For most of 2023, volatility has again fallen to near pre-pandemic levels.

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The VIX attempts to measure the magnitude of price movements of the S&P 500 (i.e., its volatility). The more dramatic the price swings are in the index, the higher the level of volatility, and vice versa. In 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. There are a range of different securities based on the CBOE Volatility Index that provide investors with exposure to the VIX. Alternatively, you can buy and sell VIX options and futures contracts.

It measures 30-day expected or forward-looking volatility of the U.S. stock market based on the S&P 500 options. Call options give the buyer the right to buy a stock at a specified price during a specific period of time while put options give buyers the right to sell a stock at a specified price during a specific period of time. However, it’s impossible to purchase a basket of securities that track the VIX. It’s possible to buy futures contracts or exchange-traded funds (ETFs) and exchange-traded notes that own these futures contracts in an effort to mirror the index. Because the volatility index tends to rise when the S&P 500 falls, investors might do so if they’re bearish on the stock market.

Therefore, opportunities to profit exist for several months after a change in the VIX. You can also use something like the TTM Squeeze to make quick trading decisions. Elizabeth Volk has been writing about the stock and options markets since 2007. 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. The investment information provided in this table is for informational and general educational purposes only and should not be construed as investment or financial advice. Bankrate does not offer advisory or brokerage services, nor does it provide individualized recommendations or personalized investment advice.

Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas’ experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning. If you’re looking best commodity etf for limited volatility, these companies might be a good bet. This cost of borrowing money can be important to both your personal finances and evaluating a company. Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more – straight to your e-mail.

VXZ is structured as an exchange-traded note (ETN), a type of unsecured debt security that makes no interest payments and has stock-like characteristics. This fund tracks the S&P 500 VIX Mid-Term Futures Index Total Return, providing exposure to a daily rolling long position in the fourth-, fifth-, sixth-, and seventh-month VIX futures contracts. Investors seeking exposure to the VIX can’t invest in the index directly. So VIX ETFs provide sophisticated investors a way of tracking volatility through VIX futures contracts. These contracts will rise and fall in price alongside volatility, although not always in a way directly correlated with the VIX’s movement.