The VIX Explained: What the Volatility Index Measures and How to Read It

What the VIX measures

The VIX is the Cboe Volatility Index. It measures the volatility the options market expects for the S&P 500 over the next thirty days, expressed as an annualised percentage. A VIX of 20 means options are priced as if the index will move with an annualised standard deviation of 20%.

It is computed from the prices of a wide strip of S&P 500 put and call options across the two expirations that bracket thirty days, weighted so that the result is the price of a variance swap rather than the implied volatility of any one option. Because the formula uses out-of-the-money puts heavily, and puts are what investors buy for protection, the VIX rises when demand for protection rises. It is not a measure of past volatility and not a survey of sentiment; it is a price.

The rule of 16

Annualised volatility is converted to a daily figure by dividing by the square root of the number of trading days in a year, and the square root of 252 is just under 16. So the VIX divided by 16 is the one-day move, up or down, that options are pricing as a one-standard-deviation event:

Expected daily move ≈ VIX / 16

The monthly figure divides by the square root of twelve. A one-standard-deviation move is exceeded about one day in three, so a VIX of 16 says that a daily move of more than 1% is expected on roughly a third of days.

Levels

The VIX has averaged a little under 20 over its history. Readings in the low teens describe a calm market in which protection is cheap; readings above 30 describe stress; readings above 40 have come only in crises. The record closes are 80.86 in November 2008 and 82.69 on 16 March 2020. The index spikes faster than it falls: a sell-off can double it in days, and the decline back is usually a matter of weeks.

The VIX moves opposite to the S&P 500 most of the time, which is why it is called the fear gauge, but the relation is not symmetrical. A falling market raises it sharply; a rising market lowers it gently. And a low VIX is not a forecast of calm: the index was below 12 for most of 2017 and spiked past 50 in February 2018. A low reading says protection is cheap, which is a statement about the cost of insurance, not about the chance of a fire.

The term structure

VIX futures trade for each of the next several months, and their prices form a curve. Most of the time the curve slopes upward, in contango: a future expiring in three months is priced above the spot VIX, because uncertainty rises with the horizon and because sellers of volatility demand a premium. In stress the curve inverts into backwardation, with the spot VIX above every future, because the market expects the present panic to subside. The flip from contango to backwardation is itself a signal that a sell-off has become a stress event, and the return to contango is one of the more reliable signs that it is ending.

The VIX cannot be bought. The futures, options on the VIX, and exchange-traded products built from the futures can, and the products pay a steady cost in contango as they roll from a cheaper near month into a dearer far one, which is why long-volatility products lose most of their value over time in a calm market.

Other volatility indices

The same method produces volatility indices for other markets. The MOVE index measures expected volatility in Treasury yields and often leads the VIX when the trouble starts in rates. GVZ is the gold volatility index and OVX the oil one. VVIX is the volatility of the VIX itself, the price of options on the index, and rises when the market is paying up to hedge a volatility spike.

On the desk

The insights page reads the regime across assets with the volatility indices in the mix, and the measured volatility of every instrument, annualised from its own daily closes, sizes the ranges and the risk meter in the notebooks, so a range quoted on a day the VIX is at 30 is wider than one quoted at 13.