If you were wrong, and volatility didn’t increase, your losses to your VIX position could be mitigated by gains to your existing trade. The VIX is a real-time volatility index, created by the Chicago Board Options Exchange (CBOE). But the index is forward-looking, which means that it only shows the implied volatility of the S&P 500 (SPX), also known as the US 500 on our platform, for the next 30 days.

They give the trader the right, but not the obligation, to trade the S&P 500 at a set price, before a set date of expiry. Let’s say that you have a long position on the stock of a US company that was a constituent of the S&P 500. Although you believe it has long-term prospects, you want to reduce your exposure to some short-term volatility. You decide to open a position to buy the VIX with the expectation that volatility is going to increase.

Institutional Sentiment and the VIX

Institutions often use options to hedge their portfolios against potential market downturns. By monitoring the VIX, investors can gauge whether institutions are increasing their hedging activities, indicating a more cautious outlook on the market. 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. 1 We price our Volatility Index (VIX) contracts in a different way to the rest of our cash index markets.

The Chicago Board Options Exchange Volatility Index, commonly known as the VIX, is a widely recognized measure of expected volatility in the US stock market. It is often referred to as the “fear gauge” as it reflects investors’ perception of market risk and fear. In this article, we will explore what is the VIX, how it is calculated, its significance as a contrary market indicator, and its potential use in determining investment returns. CFDs and forex (FX) are complex instruments and come with a high risk of losing money rapidly due to leverage. 65% of retail investor accounts lose money when trading CFDs with this provider.

Stocks Give Back Earlier Gains

It is important to note that extreme levels of the VIX are rarely sustained for long periods of time, and the index tends to revert to its mean. what is the spread in forex The Cboe Volatility Index – frequently referred to by its ticker symbol, “the VIX” — is a real-time measure of implied volatility on the benchmark S&P 500 Index (SPX). Not only is the VIX used as a quick gauge of short-term investor sentiment, it’s also the basis of many active investing strategies, from portfolio hedging to directional speculation. The VIX measures the implied volatility of the S&P 500 (SPX), based on the price of SPX options.

• While the VIX can signal uncertainty, it does not necessarily predict long-term market direction.
• For the past several years, if the VIX was trading below 20 then the market was considered to be in a period of stability, while levels of 30 or more indicated high volatility.
• The VIX is sometimes referred to as ‘the fear index’ because it negatively correlates closely with the S&P 500.
• Not only is the VIX used as a quick gauge of short-term investor sentiment, it’s also the basis of many active investing strategies, from portfolio hedging to directional speculation.
• If there was volatility, your prediction would have been right, and you could take a profit.

A higher VIX suggests increased market uncertainty and investor fear, while a lower VIX indicates a more stable market environment. As such, the VIX can provide valuable information for investors looking to assess market conditions and make informed investment decisions. The calculation of the VIX is complex, but it involves aggregating the weighted prices of multiple swing trading patterns put and call options on the S&P 500 Index. This calculation takes into account the implied volatility of these options, which is influenced by the supply and demand dynamics in the options market. Let’s say that the combination of low volatility and high economic growth had led to steady growth in the S&P 500 constituent’s share prices. You might decide to short volatility with the expectation that the stock market will keep rising and volatility will remain low.

Futures and futures options trading involves substantial risk and is not suitable for all investors. Please read the Risk Disclosure Statement and other relevant Futures Disclosures located at /fcm-disclosures prior to trading futures products. Futures accounts are not protected by the Securities Investor Protection Corporation (SIPC). The current VIX reading suggests uncertainty, but history shows that volatility spikes are temporary.

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If there was volatility, your prediction would have been right, and you could take a profit. However, if you had taken a long position and there was no volatility in the market, your position would have suffered a loss. For the past several years, if the VIX was trading below 20 then the market was considered to be in a period of stability, while levels of 30 or more indicated high volatility. Still, remember, trading volatility is not trading a market downturn, as it is possible for the market to decline but volatility remain low. The VIX works by tracking the underlying price of S&P 500 options – not the stock market itself. Below you’ll learn what S&P 500 options are, how the VIX is calculated and what its value means.

• Over the past few weeks, market volatility has been on the rise again, with the CBOE Volatility Index (VIX) gaining attention.
• Market volatility, volume and system availability may delay account access and trade executions.
• While the VIX alone does not determine investment returns, it can be a useful tool in developing investment strategies and managing risk.
• On the other hand, a lower VIX value suggests lower expected volatility, indicating a more stable and calm market.
• Let’s say that you have a long position on the stock of a US company that was a constituent of the S&P 500.

Learn about VIX and S&P 500 options

You should consider whether you understand how CFDs, FX, or any of our other products work and whether you can afford to take the high risk of losing your money. While the VIX only measures S&P 500 volatility, it is commonly used as a benchmark for the entire US stock market. The price of options is considered a good measure of volatility as if something concerns the market, traders and investors tend to start buying options, which causes prices to rise. This is why the VIX is also known as the fear index, as it measures the level of market fear and stress. Content disclaimer None of the information provided on this website constitutes an offer, solicitation, or endorsement to buy or sell any financial instrument, nor is it financial, investment, or trading advice. Saxo Bank A/S and its entities within the Saxo Bank Group provide execution-only services, with all trades and investments based on self-directed decisions.

Traders should carefully consider their risk tolerance and have a thorough understanding of the products they are trading before engaging in volatility trading strategies. Historically, there has been an inverse relationship between the VIX and market returns. When the VIX is high, indicating heightened market fear, it is often a signal that the market may be near a bottom. On the other hand, when the VIX is low, it suggests a more bullish sentiment and the possibility of a market top.

In simple terms, a rising VIX signals uncertainty, while a declining VIX suggests confidence returning to the market. Over the past few weeks, market volatility has been on the rise again, with the CBOE Volatility Index (VIX) gaining attention. As of March 11, 2025, the VIX closed at 26.92, reflecting heightened uncertainty in the markets. This increase follows a series of geopolitical and economic concerns, most notably President Trump’s renewed tariff threats and broader fears of an economic slowdown.

Market volatility, volume and system availability may delay account access and trade executions. A key characteristic of the VIX is that it is mean-reverting, meaning that after periods of extreme highs, it usually moves back toward its long-term average. Historically, the VIX does not remain elevated for long unless a major economic downturn is unfolding. As such, many analysts and market watchers track the VIX as a contemporaneous indicator of investor sentiment, and it’s often referred to casually as the “fear gauge.” First introduced by the Chicago Board Options Exchange (Cboe) in 1993, the initial version of the VIX reflected a rolling 30-day calculation of at-the-money implied volatility (IV) on S&P 100 Index (OEX) options.

When the VIX is up, it means that there are significant and rapid price fluctuations in the S&P 500. The VIX typically has a negative correlation with the S&P 500, so in periods of market stress, the VIX increases. By taking a position on the VIX, you could potentially balance out other stock positions in your portfolio and hedge your market exposure. Information on our international website (as selected from the globe drop-down) can be accessed worldwide and relates to Saxo Bank A/S as the parent company of the Saxo Bank Group. Any mention of the Saxo Bank Group refers to the overall organisation, including subsidiaries and branches under Saxo Bank A/S.

Margin trading increases risk of loss and includes the possibility of a forced sale if account equity drops below required levels. Margin trading privileges are subject to Webull Financial, LLC review and approval. Greater leverage creates greater losses in the event of adverse market movements. For long-term investors, short-term volatility is part of the investing process. While the VIX can signal uncertainty, it does not necessarily predict long-term market direction. The VIX is calculated using S&P 500 index options and provides insight into how much volatility traders expect over the next month.

For short-term traders and options strategists, the VIX is a crucial risk indicator. While the VIX itself cannot be directly traded, investors have various options to gain exposure to volatility through derivative products linked to the VIX. The Chicago Board Options Exchange (CBOE) introduced VIX futures and options, allowing investors to trade on expected changes in volatility.

This calculation is no longer widely used or tracked, but the “old VIX” is still available under the ticker symbol VXO. On our side, we price our cash Volatility Index (VIX) contracts in a different way to exness broker reviews the rest of our cash index markets. To be considered for the VIX index, an option must have an expiry date between 23 and 37 days.

All trading and investing comes with risk, including but not limited to the potential to lose your entire invested amount. If you don’t feel confident enough to start trading on live markets, you might want to consider opening a demo CFD trading account. Our free demo account comes preloaded with $20,000 in virtual funds, which can be used to practise trading thousands of markets. Once you’re happy that your strategy would work on live markets, you can decide to trade on a live account.