zpostcode
What kind of mood is the market in? Check the Cboe Volatility Index (VIX)
Apr 3, 2025 4:28 AM

  

What kind of mood is the market in? Check the Cboe Volatility Index (VIX)1

  Follow the fear gauge.Source: Barchart.com. For educational purposes only.Volatility and uncertainty are part of everyday life. Take the weather, for example. If your local meteorologist forecasts heavy rain, you don’t leave the house without an umbrella. And if the forecast calls for violent weather—a hailstorm or tornado, for example—you might not leave the house at all. Volatility is also part of the financial markets, and investors and traders should be constantly on the lookout for signs of disruption or tumult that could send prices jumping this way and that.

  One way to track financial market volatility is to look at the Cboe Volatility Index (VIX), nicknamed the market’s “fear gauge.” Understanding what market volatility is and how the VIX measures volatility can help you get a sense of potential trouble brewing—and perhaps whether it’s time to grab an “umbrella” for your portfolio.

  Volatility in real time: Get to know the VIXAsk a market watcher how the market is doing, and they’ll likely tell you whether the major stock indexes are up or down that day. Ask them whether the market is calm or jittery, and they’ll probably quote the VIX.

  Launched in 1993 by the Chicago Board Options Exchange (now Cboe Global Markets [CBOE]), the VIX is the most widely followed and cited volatility gauge for the U.S. stock market.

  The VIX is based on prices of options on the S&P 500. It’s calculated by aggregating weighted prices of the index’s call and put options over a wide range of strike prices. The VIX formula is based on options that expire in a little over three weeks and a little under five weeks, which effectively means that on any given day, the VIX reflects the market’s volatility expectations for the next 30 days.

  The VIX moves throughout the trading day. Many professional traders, money managers, and financial journalists follow it closely to get a sense of how relatively calm or jittery the market may be. The VIX often has a negative correlation with stocks, meaning that when stock prices decline, the VIX typically rises. Most of the time, the VIX is relatively subdued; in recent years, it has mostly held between 12 and 18. But the VIX occasionally spikes above 20 and even 30, which can be a sign of broader market upheaval (see figure 1).

  

What kind of mood is the market in? Check the Cboe Volatility Index (VIX)2

  SPX VS. VIX. Most of the time, particularly during a steady uptrend in the S&P 500 (SPX), the Cboe Volatility Index (VIX) stays below 20. During times of market stress, however, the “fear gauge” has risen above 80.Source: Barchart.com. For educational purposes only.For many traders, options often function as an insurance policy of sorts. That means that if traders sense trouble ahead, they might step in and buy put options to protect against a market downdraft. That activity can lead to sharp upswings in the VIX. Any number of outside events can send the VIX skyward. During the regional banking crisis of March 2023, for example, the VIX jumped from the mid-teens to above 30. But by the end of that month, after the FDIC had stepped in to quell the market’s nerves, the VIX had fallen back below 20.

  That’s implied volatility (and supply and demand) at work. When put options are in high demand, their prices rise, which raises the VIX reading. And if markets drop suddenly and violently, the VIX will rise in tandem.

  Not only for stocks: Other volatility measuresThere are volatility gauges beyond the stock market. For example, the Merrill Lynch Option Volatility Estimate, commonly known as the MOVE index, tracks volatility in Treasurys, and it has a reputation for sniffing out market turmoil a little bit ahead of the VIX.

  Like the VIX, the MOVE index uses a formula based on a weighted average of option prices to reflect collective expectations for future volatility in the fixed-income market. Sometimes referred to as the “VIX for bonds,” the MOVE index formula factors in prices for options on several benchmarks, including 2-, 10-, and 30-year Treasurys.

  During normal times, the MOVE index oscillates around the 100 mark. In 2024 it traded as low as 82 and as high as 132 ahead of the November election, reflecting uncertainty about the future of interest rates. 

  You can’t trade the VIX, but you can still trade volatilityAlthough the VIX itself can’t be bought or sold like a share of stock, Cboe does list futures and options contracts based on the VIX that can be used to hedge a portfolio or speculate on the direction of volatility in coming months. There are also at least a dozen exchange-traded funds (ETFs) and exchange-traded notes (ETNs) based on the VIX.

  Futures contracts are agreements to buy or sell a predetermined amount of a commodity or financial product on a specified date. Like futures based on grain or crude oil, Cboe Volatility Index futures have a list of contract specifications, or “specs,” that buyers and sellers must follow. For example, VIX futures have a contract multiplier of $1,000, meaning that if the underlying VIX is 20, the contract’s notional value is $20,000.

  Futures can be volatile and they’re not for everyone, but investors can check the VIX futures “curve” to get a sense of the direction that professionals see volatility heading. In December 2024, for example, with the VIX at 14.34, a VIX futures contract expiring in January 2025 traded around 16.42, while April and May futures were above 18. That suggests traders thought volatility would pick up in early 2025 (see figure 2).

  

What kind of mood is the market in? Check the Cboe Volatility Index (VIX)3

  Figure 2: VOLATILITY IS LOOKING UP? In early December 2024, the VIX was at 14.34, and each futures contract month was trading higher than the previous month. Such a curve is said to be in “contango” (as opposed to “backwardation, in which the front contract month trades at a higher price than deferred months).Source: Barchart.com. For educational purposes only.In figure 2, the VIX futures curve is in “contango,” sloping upward—the lower prices are in the near term, and gradually rise for future months.

  The bottom lineMarket volatility is inescapable and outside the control of every type of investor and trader. But prudent investors who keep an eye on volatility gauges like the VIX can get a sense of the market’s general sentiment and stability and stay apprised of any rough patches that may be in the forecast.

  Just remember that the VIX isn’t a foolproof crystal ball looking into the future. Sometimes a market shock will be so out of the blue that even professional market makers and institutional traders are blindsided.

  ReferencesCboe VIX FAQ | cboe.comVolatility Investing | finra.org

Comments
Welcome to zpostcode comments! Please keep conversations courteous and on-topic. To fosterproductive and respectful conversations, you may see comments from our Community Managers.
Sign up to post
Sort by
Show More Comments
Recommend >
Rafah
     RafahView over Rafah, a Palestinian city in the southern Gaza Strip, August 8, 2022.(more)      Gaza StripRafah, city along the border of the Gaza Strip and Egypt that, for most of the 20th and into the 21st century, has been bisected with an eastern half in the Gaza area and a western half in Egypt. It includes the only...
Neo-Babylonian empire
  Neo-Babylonian empire, ancient Middle Eastern empire with its capital at Babylon. It dominated much of Southwest Asia from shortly after its founding in 626 bce until the defeat of its final king by the Persian king Cyrus the Great in 539 bce. Memory of this empire was preserved through the centuries by the biblical accounts of the deeds of one...
Money market account vs. checking account: Which is best?
     A checking account is a financial workhorse. From paying bills, to shopping, to getting quick cash, a checking account can do it all—except when it comes to paying you a decent interest rate on your balance.   The yields on most checking accounts are minimal at best, and many pay nothing at all. But there is an alternative. A money...
Igbo Landing
  In 1803, having just overpowered their captors on a small slave vessel off the coast of a small island in Georgia, a group of Igbo people chose death over a life of enslavement and defiantly waded into the cool coastal waters and drowned. One of the largest mass suicides of enslaved West Africans in the history of chattel slavery, the...
Information Recommendation
Supply chain management: From raw materials to retail
     Take a look around your home. Almost every product you see—from the simplest grocery item to the most sophisticated device—took hundreds, if not thousands, of steps to get there. It required numerous resources, activities, and people to get from an idea to its end state. From raw materials and creation, to marketing, sales, and transportation—there’s a flow to the...
What is credit counseling and how does it work?
     If you have debt, it’s easy for your obligations to become unmanageable. You may be feeling stressed—that’s relatable!—but you may be able to find some relief through credit counseling. A credit counselor can provide you with crucial support and education throughout your debt repayment journey.   If you’re ready to tackle your debt head-on and carry out a repayment plan,...
Frauenkirche
     FrauenkircheThe Frauenkirche, Dresden, Germany.(more)Frauenkirche, Lutheran church in Dresden, Germany, that has long been the symbolic heart of the city. It showed the beauty and power of Dresden and its dedication to Lutheranism, then later recalled the horrors of World War II, and now stands for the city’s resilience and the reconciliation between former enemies.   Dresden’s city council commissioned the...
Shrinkflation: Inflation hiding in plain sight
     There sure is a lot of air in this bag of chips. A “fun size” candy bar was a lot more fun when we were kids. That new “easier-to-hold” sports drink bottle is the same height, but thinner in the middle. And why is Fluffy suddenly doing her “I’m hungry” meow two hours after dinner?   It’s not your imagination—it’s...
Money market account vs. CD: Which one should you choose?
     The record-low interest rates common in the 2010s may have made you hesitant to put your money into a money market account or especially a certificate of deposit (CD). But since the Federal Reserve has hiked interest rates, the yields offered on these accounts have risen significantly. That’s prompted savers to once again consider these traditional savings accounts—and perhaps...
Powers of attorney: What they are and how they work
     A power of attorney (POA) doesn’t refer to a lawyer. Rather, a POA is a legal document that you (the principal) can use to delegate your wishes to a trusted agent who can act on your behalf in legal, financial, or health care matters.   This delegation of power is typically used when you’re incapacitated, perhaps because of an illness...
What is private credit? A guide to direct lending
     When investors look to yield-bearing assets in the alternative debt universe, it’s usually to pursue higher yields compared with traditional debt and fixed-income securities, and to achieve a deeper level of diversification beyond conventional stocks and bonds.   One alternative investment that’s grown considerably over the last few decades is private credit, a subset of the private debt market. The...
Robert D. Bullard
  Robert D. Bullard (born December 21, 1946, Elba, Alabama, U.S.) is an American sociologist and environmental activist, often referred to as the father of environmental justice.   Early life and education Bullard was born and raised in Elba, Alabama, a small town in the southeastern region of the state. His father was an electrician and a plumber, though he was unable...