CBOE Volatility Index (VIX)

VIX is the ticker symbol for the CBOE Volatility Index. Since its introduction in 1993, the VIX index has quickly become the benchmark for stock market volatility. As volatility often goes hand-in-hand with financial turmoil, the VIX is also known as the "investor fear gauge".

The VIX index is quoted as a percentage that represents an expected annual change of the S&P 500 index and it measures the market's expectation of 30-day S&P 500 volatility as reflected in the prices of near term S&P 500 index options. As investors expect bigger movements, options tends to become more expensive. The VIX measures this price.

Hence, the primary use of the VIX volatility index is as an indicator to options traders as to when they should buy or sell options. When the VIX is low, it's a good time to buy options as they are now relatively cheap. After the VIX has established its peak, one should sell options as they have become more expensive.

VIX Characteristics

Negative correlation to the S&P 500

According to data obtained from CBOE's website, the VIX has moved opposite the underlying S&P 500 index (SPX) 88% of the time since 1990, with an average rise of 16.8% on days when the SPX drop 3% or more.

Known Trading Range

Another property of the VIX is that it trades within a given range of between 10 and 50. The VIX bottoms out at around 10. It can never reach zero as that would mean that the market expects no daily movement of the underlying S&P 500 index - which is an impossibility. For the VIX to stay above 50 requires large changes over an extended period of time - another near impossibility.

Daily closing prices for the S&P 500 and VIX from Jan 1990 to Dec 2005

Trading the VIX

The VIX is not an asset but a statistic. Hence, you cannot buy or sell the VIX directly. To trade the VIX, you need to trade the VIX derivatives. To capitalize on the VIX's unique properties, VIX options and futures can be used for hedging and speculation.

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