The VIX index is a key benchmark that helps us see stock market volatility. It’s sometimes called the fear index because of the way that it shows us the changes in market sentiment among investors and traders.
The VIX index is useful because it tells us what level of volatility the S&P 500 index may have in the following month. Since the S&P is considered a useful gauge for the broader market, it makes this a way of understanding expected overall volatility.
It was introduced in 1993 by the Chicago Board Options Exchange and is now known by the indexCBOE: VIX ticker. The charts showing the movement in this index are widely used by traders in the US and beyond, thanks to the way they help us understand what might happen next.
Understanding the future market volatility is the main reason for looking at the world VIX index. So, how can you use this information? CFDs are an example of a financial instrument where understanding market volatility is essential to help you make good decisions.
What Is the VIX Volatility Index and Why Does It Matter?
What is the VIX index meaning in relation to the amount of fear currently being felt among investors? The VIX volatility index is known as the fear gauge because it generally rises when there is a lot of uncertainty in the market. People associate a high level of VIX with a great deal of fear among traders and investors.
On this index, VIX doesn’t actually measure fear. Rather, it’s calculated based on the expected volatility of the market, based on the expectations of traders. This is important because it means that we can use it to understand market sentiment and what might happen next.
Traders tend to follow the VIX CBOE index more closely during moments of uncertain market conditions, to get a better feel for what direction the market might take now.
How Is the VIX Index Calculated?
The VIX index works by taking the weighted prices of S&P 500 options. The data used is the midpoints of bid and ask price quotes, allowing the VIX volatility index to be calculated and giving us a level of implied volatility.
Understanding how the CBOE VIX figure is calculated allows us to forecast risk expectations in the market, as we can see the overall feeling in the market for how traders expect the market to act in the next 30 days.
INDEXCBOE: VIX Chart – How to Analyse VIX Index Data
A VIX chart gives you a simple way to visualise the market’s volatility trends, making it an essential tool for traders.
The first point to bear in mind is that the VIX index chart moves up when there is more perceived fear and risk in the market, or more uncertainty. A stable market is more likely to see the current VIX index value drop. In general terms, a VIX charge reading of under 20 is classed as being a stable, low-risk market. However, spikes or drops in the volatility can occur suddenly.
Looking at historical charts lets you get a feel for how this index moves over time, while the intraday charts show you what’s happening in real-time. The INDEXCBOE VIX today gives you a glimpse of how market sentiment is evolving.
VIX and S&P 500 – Understanding the Correlation
When looking at the relationship between the S&P 500 and VIX, we need to understand that it’s inverse. When the stock market falls, the VIX index rises. This is because the index shows market uncertainty or fear, so the higher it is, the more uncertainty is in the air.
When does this inverse S&P and VIX relationship look like when the market is stable? In this case, the lack of uncertainty leads to a low VIX index.
This can be seen when we look at the evidence of historical volatility spikes in the S&P 500. The VIX index hit its historic high point in October 2008, tying in with the global financial crisis that caused chaos at that time.
VIX Trading - How to Trade the VIX
Various types of VIX investing and trading give you exposure to this index.
- Futures and options on VIX let you trade based on your thoughts on future market volatility.
- VIX ETFs and ETNs give exposure to volatility-focused instruments that are typically used by traders looking to benefit from market downturns during uncertain conditions.
- CFDs on volatility indices via brokers like ActivTrades. This VIX trading option is designed so that you can aim to make profits from volatile market conditions without buying the underlying assets.
When considering how to trade VIX in any of these ways, you should consider the possible benefits and risks. Any product that uses leverage to take advantage of market volatility has to be considered as risky, meaning that you should carry out a risk assessment before making an informed decision.
Why Traders Use the VIX Index for Risk Management
Traders use the VIX volatility index as a way of assessing market risk. They look at this chart as telling them how much fear or uncertainty exists in the market, which can be an effective indicator for market sentiment in certain situations.
This means that they can use the chart for the VIX CBOE index to hedge portfolios. It also provides valuable information that can be used to spot opportunities in volatile conditions, as it provides a clear sense of the fear or uncertainty in the market.
The index with VIX details is a contrarian indicator that goes up when the market falls, and it falls when the market is up. This makes it a valuable way to gauge investor sentiment, but to use it well, you need to understand how it works before you begin.
INDEXCBOE: Vix Volatility Index FAQs
Can I buy shares of the VIX Index directly?
No, this isn’t a stock that you can buy or sell. Rather, it’s an indicator of market sentiment. However, you can find a selection of investment vehicles like ETFs and CFDs that are linked to the VIX volatility index.
What is the best position on the CBOE VIX chart for traders?
It depends on what type of trade you want to make. If the index from the VIX chart is below 20, this suggests a low amount of volatility, which generally indicates optimistic market conditions. Higher figures of 30 and above suggest that there is a lot of uncertainty, which could favour certain types of trading.
Is there a world VIX Index?
No, this volatility index focuses exclusively on the S&P 500 companies. It works as a global measure of market sentiment because of the size and diversity of the companies featured on this index. This ensures that it acts as a realistic gauge of the overall markets.
How far ahead does the VIX Index look?
This index tells us the expected volatility levels in American markets during the next 30 days. It’s updated in real-time, so you can always see 30 days in advance of the present moment.
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