What the VIX measures
The VIX (Cboe Volatility Index) expresses, as an annualized percentage, how much the options market expects the S&P 500 to move over the next 30 days. Because it rises sharply when markets are anxious, it is often called the “fear index”. The key point is that it is not the past swing in prices (historical volatility) but the expectation built into the prices of options trading now (implied volatility).
- Who makes it: the Chicago Board Options Exchange (Cboe) first published it in 1993 and switched in 2003 to today’s method (S&P 500 options, using many strike prices together).
- What it is calculated from: among S&P 500 options with 23 to 37 days to expiration, the two nearest expirations are chosen, put and call prices across many strikes are combined, and the result is adjusted to exactly 30 days.
- Why options: when more people want protection against a big fall, puts — which work as insurance against declines — get more expensive. Options getting more expensive means the market expects big moves.
How the VIX is built
- Option quotesS&P 500 puts and calls
- Pick two expirationsOptions with 23–37 days left
- Calculate varianceSum prices across strikes
- Adjust to 30 daysInterpolate between the two
- VIXShown as an annualized %
Reading the number: expected monthly and daily moves
A VIX of 20 means “volatility of about 20% a year, assuming it lasted a full year”. Converting it to a month or a day makes it easier to feel. Volatility scales with the square root of time, so divide as follows.
- One month: VIX ÷ √12 (about 3.46)
- One day: VIX ÷ √252 (about 15.9). That is why people often say “divide the VIX by 16 to get the expected daily move”.
Expected moves by VIX level (one standard deviation)
The VIX is an expectation for the whole S&P 500 index. Single stocks usually move much more than the index, so even with a low VIX your stocks can move 5% a day. The expected volatility of a single stock is seen separately in the implied volatility of its own options.
Normal levels and a history of spikes
Since 1990 the VIX’s long-run average has been around 20. In calm years it sits in the low-to-mid teens for long stretches (in 2017 it dipped below 10 on several days), and in big crises it jumps several times over in a short time.
| When | What happened | VIX |
|---|---|---|
| Autumn 2008 | The Lehman Brothers bankruptcy and financial crisis | Closed above 80 in November 2008 |
| February 2018 | A sharp fall after a long period of low volatility | More than doubled in a day, from the high teens to the high 30s |
| March 2020 | The spread of COVID-19 and a crash, with US circuit breakers triggered several times | Closed above 80 in mid-March, a record close |
The typical shape of VIX moves (example, not real values)
- Asymmetry: the VIX rises a lot when stocks fall, and falls only a little when stocks rise by the same amount, because demand for puts to protect against declines piles up on one side.
- Mean reversion: very high VIX readings often don’t last long, and very low ones eventually rise. But “when” can’t be known.
- Expectations run a little above reality: on average the VIX is slightly higher than the volatility that actually turns out later. Like an insurance premium, whoever takes on the risk is paid for it (the volatility risk premium).
Term structure and VIX futures
The VIX index itself can’t be bought or sold. Instead there are VIX futures (listed in 2004) and options (listed in 2006) that trade the VIX value for future months, and linking these futures prices in order of expiration gives the term structure.
VIX futures term structure: normal times and crises (example)
VKOSPI and other volatility indexes
Each market has a volatility index built the same way. It is more accurate to watch the index for the market you invest in.
| Index | Underlying market | Published by |
|---|---|---|
| VIX | US S&P 500 options | Cboe |
| VXN | US Nasdaq-100 options | Cboe |
| VKOSPI (KOSPI 200 volatility index) | KOSPI 200 options | Korea Exchange |
The VKOSPI is a “Korean VIX” that calculates expected volatility over the next 30 days from KOSPI 200 option prices. In crises that shake global markets together it rises with the VIX, but for events specific to the Korean market, such as domestic policy or geopolitical issues, the VKOSPI alone sometimes jumps. The VXN for the tech-heavy Nasdaq-100 usually runs a few points above the VIX.
The Fear & Greed Index
“Fear index” sometimes refers to the Fear & Greed Index published by the US broadcaster CNN. The names are similar, but it is a completely different indicator from the VIX. It runs from 0 to 100: the closer to 0, the more “extreme fear”; the closer to 100, the more “extreme greed”.
The index combines seven indicators of market sentiment with equal weights.
- Stock price momentum: how far the S&P 500 is above or below its 125-day moving average
- Stock price strength: the difference between the number of NYSE stocks at 52-week highs and at 52-week lows
- Stock price breadth: the difference in volume between advancing and declining stocks (the McClellan Volume Summation Index)
- Put/call ratio: how much put trading for downside protection exceeds call trading
- Junk bond demand: the yield spread between low-rated and investment-grade corporate bonds
- Market volatility: whether the VIX is above or below its 50-day moving average
- Safe haven demand: the difference in returns between stocks and Treasuries over the last 20 trading days
Comparing the VIX and the Fear & Greed Index
| VIX | Fear & Greed Index | |
|---|---|---|
| What it measures | Expected 30-day volatility (options) | Seven sentiment indicators |
| Units | Annualized %, higher means more anxious | 0–100, lower means more fear |
| Published by | Cboe (continuously during the session) | CNN |
| Tradable products | Futures and options exist | None (for reference) |
Because the Fear & Greed Index sums several indicators, it wobbles less when one indicator spikes, but it reacts more slowly, and its value depends on the periods used in the calculation (125 days, 50 days, etc.). The VIX’s movement is one of the seven inputs, so the two often move in the same direction.
Pitfalls when using it for investing
There is an old saying that “times of great fear are opportunities”, but the VIX is not a signal of the bottom. In 2008 US stocks kept falling for months, until March 2009, even after the VIX passed 40. Nor does a low VIX mean safety: as in February 2018, a market that had been calm for a long time can change in a day.
- Use it to gauge the size of risk: when the VIX is high, the same amount invested swings much more in a month than usual. You can use it to check whether that fits within the losses you can bear (position size in chapter 8).
- Read it with the calendar: the VIX often rises before FOMC and CPI releases and falls after the results. Release dates are in the US market calendar.
- Don’t use it to predict direction: a high VIX means big moves are possible both up and down. In crises, big falls and big rebounds alternate.
- Watch your own market’s index: if you mostly hold Korean stocks, the VKOSPI is a closer gauge; if you mostly hold tech stocks, the VXN.