Table Of Content
What Is the VIX?
The VIX, short for the CBOE Volatility Index, measures expected stock market volatility over the next 30 days. It’s often called the “fear gauge” because it reflects investor sentiment and market uncertainty.
When the VIX rises, it signals that traders anticipate larger price swings, usually due to uncertainty or fear around economic data, earnings, or global events.
For example, during the early months of the COVID-19 pandemic in 2020, the VIX spiked above 80—its highest level ever—because of panic selling and extreme uncertainty.
On the other hand, a low VIX (typically under 15) suggests stable conditions and market confidence, as seen during much of 2017.
The index is widely followed by traders, portfolio managers, and institutions to manage risk, hedge positions, or gauge potential turning points in the market.
VIX Range | Market Sentiment | Example Period |
|---|---|---|
Under 15 | Low volatility, complacency | Mid-2021, parts of 2017 |
15–25 | Normal/moderate volatility | Late 2022, early 2024 |
25–35 | High uncertainty | March 2022 (Ukraine conflict) |
Over 35 | Panic/fear zone | March 2020 (COVID crash) |
How the VIX Impacts the Stock Market
The VIX doesn’t move stocks directly, but it reflects investor sentiment and often signals shifts in market momentum.
High VIX leads to selling pressure: When the VIX spikes, it typically coincides with market selloffs. For instance, in March 2020, the VIX soared past 80 during the COVID crash, and the S&P 500 dropped over 30% in just weeks.
Low VIX can encourage risk-taking: In stable periods, like mid-2021 when the VIX hovered around 15, investors tend to buy growth stocks or use leverage, assuming calm conditions will continue.
Volatility affects liquidity and spreads. During high-VIX periods, bid-ask spreads widen, and trading becomes more costly, especially in less liquid stocks or options. This reduces participation from smaller investors.
Institutional hedging increases during periods of high VIX: Pension funds and hedge funds often rebalance or hedge aggressively when the VIX rises, adding volatility to the broader market.
Because the VIX reflects expectations, sudden changes in the index often precede major market turning points. Monitoring it helps investors anticipate moves driven by volatility.
How to Trade the VIX
You can’t buy the VIX directly, but there are several ways to trade based on its movement and market volatility.
VIX futures and options: Traders use VIX derivatives to speculate or hedge. For example, during the 2022 Fed rate hike cycle, some investors used VIX calls to profit from expected spikes in volatility.
Volatility ETFs and ETNs: Products like the ProShares VIX Short-Term Futures ETF (VIXY) or iPath Series B S&P 500 VIX ST Futures ETN (VXX) track VIX futures. These are popular among retail traders for short-term plays, but they suffer from decay over time.
Pairing with S&P strategies: Some traders short the S&P 500 and go long on VIX futures when they anticipate downside risk, especially around earnings season or geopolitical events.
Trading the VIX requires understanding of futures pricing and time decay, making it better suited for advanced investors.
How the VIX Is Calculated
The VIX is calculated using real-time prices of S&P 500 Index options—specifically those with 23 to 37 days until expiration.
Instead of relying on historical volatility, it uses implied volatility based on how much traders are willing to pay for options.
The formula considers both call and put options to determine the expected range of movement in the S&P 500.
The CBOE uses a complex weighted average of these prices to arrive at a single VIX value, which is updated every 15 seconds during trading hours.
Historical Events That Caused the VIX to Spike
Several significant events since 2020 have triggered extreme market uncertainty, pushing the VIX to sudden highs.
March 2020 – COVID-19 outbreak: As global lockdowns began, the VIX hit an all-time high above 80, reflecting panic across global markets.
March 2022 – Russia-Ukraine war escalation: Geopolitical tensions and surging oil prices pushed the VIX above 35, as investors feared broader global conflict and inflation shocks.
October 2023 – U.S. bond yield surge: Rapid increases in Treasury yields triggered fears of a hard landing for the economy, pushing the VIX near 30.
- April 2025 – Trump tariffs: The recent spike in the VIX to over 60 in early April 2025 was primarily driven by President Trump's announcement of sweeping tariffs on imports, dubbed “Liberation Day.”
Each of these events illustrates how quickly the VIX can react to news, making it a vital real-time indicator for market stress.
FAQ
You can't buy the VIX itself since it's an index, not a security. However, there are futures, options, and ETFs that track its movements.
A low VIX typically signals investor confidence and market stability. It often coincides with steady stock price growth and lower trading volume.
The VIX tends to spike during major economic disruptions, geopolitical tensions, or financial uncertainty—like during pandemics, wars, or major selloffs.
Not necessarily. While it reflects fear, it can also create trading opportunities or allow for portfolio protection through hedging strategies.
The VIX shows expected (implied) future volatility, while historical volatility measures past price fluctuations. They often diverge in times of rapid sentiment shifts.
Changes in the VIX are driven by option prices, which respond to investor expectations about future market movement, not past performance.
While not essential, long-term investors can use the VIX as a tool to assess market sentiment and time portfolio adjustments or rebalancing.
A VIX between 15 and 25 is often considered normal, suggesting mild to moderate expected volatility in the stock market.
