What Is VIX Telling Investors?

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what is the vix telling us

There may be other explanations for the steep VIX curve that will emerge over the coming days, or the curve may settle back to a more normal shape, but “buy the rumor, sell the news” seems to be the narrative that fits best right now. Prices are weighted to gauge whether investors believe the S&P 500 index will be gaining ground or losing value over the near term. Instead, investors can take a position in VIX through futures or options contracts, or through VIX-based exchange traded products (ETPs). For example, the ProShares VIX Short-Term Futures ETF (VIXY) and the iPath Series B S&P 500 VIX Short-Term Futures ETN (VXXB) are two such offerings that track a certain VIX-variant index and take positions in linked futures contracts. Cboe lists options contracts that derive their value from short-term VIX futures, and call options on VIX can be used to hedge equity portfolios in the expectation that VIX and stocks will continue to diverge over time. VIX calls and puts can also be used to bet on directional moves in the index itself, though traders should be aware of the unique expiry and settlement rules pertaining to VIX options.

The VIX is a number derived from the prices of options premium in the S&P 500 index (which is an index comprising 500 large cap stocks). Before purchasing a security tied to an index like the VIX, it’s important to understand all of your options so that you can make educated decisions about your investment choices. If you’re interested in investing in a VIX ETF/ETN, we recommend that you speak with a financial professional first to make sure your investment strategy fits your needs. In the last month, major stock indexes like the S&P 500 have been pulled downward as a result of disappointing earnings reports from big tech stocks.

what is the vix telling us

The VIX, formally known as the Chicago Board Options Exchange (CBOE) Volatility Index, measures how much volatility professional investors think the S&P 500 index will experience over the next 30 days. Market professionals refer to this as “implied volatility”—implied because the VIX tracks the options market, where traders make bets about the future performance of different securities and market indices, such as the S&P 500. The levels of implied volatility across a wide range of options were historically low, almost freakishly so. We see a very different setup now, with rampant call speculation pushing implied volatilities – particularly on out of the money calls – to levels above historic norms. But it is important to remember that while history doesn’t repeat, it often rhymes.


So, if the big firms on Wall Street are anticipating an upswing or downswing in the broader market, they may try to hedge against that volatility by placing options trades. If many of the large investment firms are anticipating the same thing, there is usually a spike in options trading for the S&P 500. The VIX index uses the bid/ask prices of options trading for the S&P 500 index in order to gauge investor sentiment for the larger financial market.

  1. However, it is very important that we understand that the VIX is not right or wrong in its current or forecast measurement of S&P 500 volatility.
  2. NerdWallet, Inc. does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments.
  3. 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.
  4. Though it often gets the moniker “the market’s fear gauge”, the VIX is actually fairly easy to understand and moves for numerous reasons other than fear.
  5. The VIX index uses the bid/ask prices of options trading for the S&P 500 index in order to gauge investor sentiment for the larger financial market.
  6. In other words, usually six-month minus one-month VIX futures spreads should be positive.

When you see the VIX above 30, that’s sometimes viewed as an indication that markets are very unsettled. The VIX is considered a reflection of investor sentiment, but one must remember that it is supposed to be a leading indicator. In other words, it should not be construed as a sign of an immediate market movement. The stimulus bill is the most significant piece of potentially market-moving news that is likely to emerge in the coming weeks.

Now, most investors are aware of term-structure curves in relation to commodity futures curves. Similarly, VIX can also have a futures curve where different points in the curve imply investors’ anticipation of implied volatilities at that time. When the public wants to buy large numbers of options, vols will tend to rise as market makers seek to get higher selling prices on each additional sale. The VIX options and futures can be used to both hedge a long portfolio or even used to take a position in the VIX. Our job as investors, traders, and risk managers is to understand what it is and what it isn’t – to find and estimate a range of accuracy and then determine if human fear or greed is driving it to one extreme or another. The VIX has the same human flaw of perception that is found in the equity markets that frequently drive stock prices too high or too low.


Perhaps the most straightforward way to invest in the VIX is with exchange-traded funds (ETFs) and exchange-traded notes (ETNs) based on VIX futures. As exchange-traded products, you can buy and sell these securities like stocks, greatly simplifying your VIX investing strategy. Downside risk can be adequately hedged by buying put options, the price of which depend on market volatility.

We have discussed how fiscal stimulus was a key catalyst behind last year’s market rebound and many economic commentators have linked today’s surprising 5.3% jump in January retail sales to the recent $600 checks. At one point, investors viewed the upcoming proposal to be a slam-dunk, with bi-partisan support for most of its tenets. As with much in DC, Forex Brokers bi-partisanship proved to be fleeting, with Republican Senators lining up in opposition to the bill and some Democratic Senators showing dismay with some of its specifics. Look for the S&P 500 to stabilize within the current eight year price channel, hopefully closer to the upper range of the channel and not a retest of slower 200 day moving averages.

what is the vix telling us

I have written on the jump in the VIX that occurred in February, taking investors by surprise. While there was a precursor to this unprecedented surge in the VIX (a compression of spreads between implied minus realized volatility), it was subtle and the move was very sudden. VIX moves are important due to their strong negative correlation to equities.

One of the most popular and accessible of these is the ProShares VIX Short-Term Futures ETF (VIXY), which is based on VIX futures contracts with a 30-day maturity. Some exchange-traded securities let you speculate on implied volatility up to six months in the future, such as the iPath S&P 500 VIX Mid-Term Futures ETN (VXZ), which invests in VIX futures with four- to seven-month maturities. The CBOE Volatility Index—also known as the VIX—is a primary gauge of stock market volatility. The VIX volatility index offers insight into how financial professionals are feeling about near-term market conditions. Understanding how the VIX works and what it’s saying can help short-term traders tweak their portfolios and get a feel for where the market is headed.

The Stock Market Is Melting Up. Prepare for a Short-Term Correction.

The ETF Profit Strategy Update is continuously analyzing the VIX and other setups to help keep profits larger and reduce trading risk. Given today’s negative news driven market, an expected sky-high VIX would not seem out of the question. However, this simply has not been the case as the VIX now sits closer to its yearly lows than highs. Look for volatility to diminish with the VIX generating lower and lower highs in a normal attenuation period. This will be the first signal of the market finding a consolidation level. In 2016, WisdomTree launched its first option-selling strategy, the WisdomTree CBOE S&P 500 PutWrite Strategy Fund (PUTW), which tracks the Cboe S&P 500 PutWrite Index (PUT).

A look at Figure 2 should be an eye-opener, as it shows that each time the VIX has declined below 20, a major sell-off has taken place shortly after. Whenever the VIX dips below 20, the stock market marks a medium-term top. As the VIX is breaking below 20 in Figure 1, it indicates that the investment crowd is extremely complacent about the current outlook, having little reason to worry.

If you’ve been following financial news, you may have heard the word “volatility” being thrown around a lot — and you may have heard a reference to a volatility measurement called the VIX. It’s interesting to note that the VXN, which is the symbol for the implied volatility index of the Nasdaq 100 index, is even more bearish at the end of the summer of 2003. In Figure 2, the VXN, which is calculated the same way as the VIX, dropped to levels not seen since the complacent summer of 1998, when the VXN was below 29.5. Let’s take a closer look at some numbers for the VIX, to see what the option markets tell us about the stock market and mood of the investing crowd. Generally speaking, if the VIX index is at 12 or lower, the market is considered to be in a period of low volatility. On the other hand, abnormally high volatility is often seen as anything that is above 20.

How Can an Investor Trade the VIX?

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. I can see three potential problems surrounding the bill’s passage that could be causing unease.

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. 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 cmc markets scam is possibly headed for a big move up or down or when it may be ready to quiet down after a period of volatility. Meanwhile, the IAI, which also has proven to be a leading indicator to the VIX, has shown some divergence. During the time period mentioned above, despite some concerns about the market, the overall IAI actually moved lower.

The VIX suffered huge whipsaws in 2009, 2010, and 2011 trying to over compensate and find some realm of equilibrium between perception and math. If we look at historical points of the VIX we see that during the height of the great housing just2trade review crisis in 2008 and 2009 the VIX rocketed to levels far above 50. For our understanding of the model, the options are pricing that the S&P 500 index (the largest 500 companies) will be in a range of +/- 50% over the year, 68% of the time.

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