What is the VIX? The volatility index explained

The VIX is the Cboe Volatility Index, a number that measures how much the options market expects the S&P 500 to move over the next 30 days. It is calculated from the prices of S&P 500 index options and quoted as an annualised percentage, so a VIX of 20 means options are priced for annualised volatility of about 20%, or a typical one-month move of roughly 5.8% either way.

It is often called the "fear gauge" because it tends to jump when US shares fall sharply. That nickname is useful shorthand, but it hides two points that matter to traders: the VIX measures expected movement, not direction, and you cannot buy or sell the index itself. Every tradable VIX product is linked to VIX futures, which behave in their own way.

What the VIX measures

The VIX is a measure of implied volatility. "Implied" means it is backed out of option prices rather than measured from past price changes. When traders are willing to pay more for S&P 500 options, especially puts that protect against a fall, the volatility implied by those prices rises and so does the VIX.

That makes it different from historical (realised) volatility, which looks backwards at how much the index actually moved. The two are related, because traders who have just lived through a volatile week tend to price more volatility for the coming month, but they are not the same thing. Implied volatility often sits above the volatility that is later realised, because buyers of protection pay a premium for insurance.

A few basics:

• Underlying market: the S&P 500, the broad index of large US companies. If you are new to indices, start with what a stock index is.
• Time horizon: a constant 30 calendar days ahead.
• Units: annualised percentage points of volatility, in the same way that volatility is usually expressed.
• Publisher: Cboe Global Markets, which calculates the index in real time during trading hours.

The VIX does not say which way the market will go. A high reading means the options market is pricing large moves; in practice those fears are mostly about falls, because that is what investors pay to protect against.

How the VIX is calculated

The full methodology is published by Cboe and involves some heavy formula work, but the logic is easy to follow in general terms.

1. Cboe takes a wide range of out-of-the-money S&P 500 put and call options (plus those at the money) from two expiry dates, one a little under 30 days away and one a little over. Its methodology uses options with more than 23 and fewer than 37 days to expiry, including the weekly options that expire on most Fridays.
2. From the prices of each strip of options it calculates a variance figure for each expiry: in effect, how much movement the whole spread of option prices is paying for.
3. It interpolates between the two expiries to get a constant 30-day measure.
4. It takes the square root and multiplies by 100 to express the result as an annualised volatility percentage.

Because the calculation uses many strikes, not just at-the-money options, the VIX picks up how much traders are paying for protection against large moves. When demand for out-of-the-money puts surges in a sell-off, the VIX can rise very quickly.

Two practical consequences follow. First, the index is recalculated continuously during the trading day, so it can move a great deal intraday. Second, it is a model output, not a traded price; nobody can buy "one VIX" at the quoted level.

Reading the number: what a VIX of 20 implies

The VIX is annualised, but most traders want to know what it means for the next month or the next day. The conversion uses the square root of time.

From annual to monthly

There are roughly 12 months in a year, so the one-month figure is the VIX divided by the square root of 12, which is about 3.46.

Worked example (illustrative): with the VIX at 20, the implied one-month standard deviation is 20 ÷ 3.46 ≈ 5.8%. If the S&P 500 were at 5,000, one standard deviation over a month would be about 289 points, so the options market would be pricing a range of roughly 4,711 to 5,289 as a one-standard-deviation band.

From annual to daily

There are roughly 252 trading days in a year, and the square root of 252 is about 15.9. A VIX of 20 therefore implies a typical daily move of about 20 ÷ 15.9 ≈ 1.26%. Some traders use a shortcut and divide the VIX by 16.

Illustrative readings, converted the same way:

• VIX 12: about 3.5% per month, about 0.76% per day.
• VIX 20: about 5.8% per month, about 1.26% per day.
• VIX 30: about 8.7% per month, about 1.9% per day.
• VIX 40: about 11.5% per month, about 2.5% per day.

What "one standard deviation" means

A standard deviation is a statistical measure of spread. If returns followed a normal distribution, about two-thirds of outcomes would fall within one standard deviation either side of the starting point, and about 95% within two. So a VIX of 20 does not mean the S&P 500 will move 5.8% next month. It means the options market is priced as if a move of that size or less is the typical case, with larger moves possible.

Real market returns are not perfectly normal. Large falls happen more often than a normal distribution suggests, which is one reason options that protect against crashes are relatively expensive. Treat the conversion as a rough scale for the market's expectations, not a forecast and not a boundary.

The VIX and the S&P 500: why they usually move in opposite directions

Most of the time the VIX and the S&P 500 move in opposite directions. When shares fall, investors rush to buy puts as protection, implied volatility rises and the VIX goes up. When shares grind higher, demand for protection fades and the VIX tends to drift lower.

There are a few reasons the relationship is asymmetric:

• Falls are usually faster than rises. Sell-offs tend to be sharp and rallies gradual, so falling markets are associated with higher realised volatility, and option prices adjust to that.
• Hedging demand. Large investors hold long portfolios and buy puts to protect them. That demand is strongest when prices are falling.
• Leverage effects. As share prices fall, companies become relatively more indebted and their shares riskier, which can lift volatility.

The inverse link is a tendency, not a law. There have been periods when both rose together, for instance when traders bought calls aggressively during a sharp rally, and periods when shares fell slowly while the VIX barely moved. Anyone trading index products should treat the VIX as context about the market's mood, alongside the mechanics covered in trading index CFDs, rather than as a timing signal.

Notable VIX spikes

A handful of episodes show how quickly the index can move. The figures below are widely reported closing or intraday levels; check Cboe's historical data if you need exact values.

• 2008 financial crisis: the VIX reached an intraday high of about 89.5 in October 2008 and a closing high of about 80.9 on 20 November 2008, levels that stood as records for more than a decade.
• 24 August 2015: during a sharp global sell-off driven by worries about China, US stocks fell steeply at the open and the VIX touched an intraday high of around 53, then the highest reading outside the 2008 to 2009 crisis.
• 5 February 2018 ("Volmageddon"): the VIX more than doubled in a single session, from about 17 to about 37 at the close, after a long stretch of very low volatility. Products that were short volatility were hit hard. Credit Suisse announced the following day that it would redeem its inverse VIX exchange-traded note, known by its ticker XIV, after its indicative value fell by 80% or more in one day.
• March 2020: as the Covid-19 pandemic hit markets, the VIX closed at about 82.7 on 16 March 2020, its highest close on record.

Two lessons come out of these episodes. The VIX can stay low for long periods and then spike violently, and products that bet on volatility staying low can lose most of their value in a day. The XIV case in particular is why most regulators and providers treat volatility products as complex instruments.

You cannot trade the VIX directly

The VIX is a calculated index, so there is nothing to buy at the quoted level. Instead, traders use derivatives linked to it:

• VIX futures: listed on Cboe Futures Exchange. Each futures contract settles on a special opening calculation of the VIX on its expiry date, and before then it trades at whatever the market thinks volatility will be around that date.
• VIX options: options on the VIX, which are priced off the relevant VIX futures rather than the spot index.
• Exchange-traded products (ETPs): funds and notes that hold a rolling position in VIX futures, usually a mix of the first and second months. Some are leveraged or inverse.
• CFDs: where providers offer a "volatility index" CFD, it is normally based on a VIX futures contract, not the spot index. Read the product sheet to see which contract it tracks and how it is rolled.

This matters because VIX futures can trade far from the spot VIX. When the index is at 13, a future expiring in two months might be at 16 or 17, because the market expects volatility to revert towards its longer-run average. When the index spikes to 40, futures several months out might be well below 40, for the same reason. A product that tracks futures will not follow the headline VIX one for one. The general mechanics of expiring contracts are covered in how commodity futures work, and they apply here too.

Contango and roll costs in VIX products

In calm markets the VIX futures curve is usually upward sloping: each later expiry trades above the one before. This shape is called contango. The opposite, where nearer contracts trade above later ones, is backwardation, and it tends to appear during sharp sell-offs.

Contango creates a steady drag for anyone who holds long VIX futures exposure over time. As a contract approaches expiry, its price converges towards the spot VIX. If spot stays low, a futures price above it tends to drift down.

Worked example (illustrative, assuming the shape of the curve does not change):

1. The spot VIX is 15. The first-month future is at 18 and the second-month future at 19.5.
2. You buy the second-month future at 19.5.
3. A month passes, nothing much happens, and the curve looks the same. Your contract is now the first-month future and trades at 18.
4. Your position has lost (18 − 19.5) ÷ 19.5 ≈ 7.7%, even though the spot VIX ended the month exactly where it started.

ETPs that hold a rolling long position in VIX futures face this drag almost continuously, which is why their long-term charts tend to slope steadily downward, punctuated by spikes. Inverse products benefit from the drag in calm markets but carry the risk of very large, sudden losses when volatility jumps, as February 2018 showed.

For CFDs based on VIX futures, the roll shows up in one of two ways depending on the provider: as a price adjustment when the CFD moves from one contract to the next, or simply because the CFD expires and you have to reopen in the next month. Either way, a long position held through several rolls in contango has the same headwind as the ETP above.

Using the VIX as a trader

Even if you never trade a volatility product, the VIX is useful context for anyone trading indices, forex or commodities.

• Position sizing: when the VIX is high, typical daily ranges in equity indices are wider. If your stop distance widens with the market, your position size should shrink so that the amount at risk stays the same. The instruments position size calculator does the arithmetic.
• Gap risk: high-VIX periods tend to bring larger overnight and weekend gaps. Stops can be filled well beyond their level, as covered in gap risk and weekend risk and the glossary entry on a gap.
• Spreads and margin: providers may widen spreads or raise margin requirements on index CFDs when volatility is high. That can affect open positions as well as new ones.
• Cross-asset mood: a rising VIX often coincides with demand for traditional safe havens and with pressure on higher-risk currencies, but those links shift over time.

What the VIX cannot do is tell you when a sell-off will start or end. A low VIX does not mean calm will last, and a high VIX is not a reliable sign that a bottom is in. It describes what option prices imply right now.

VIX equivalents in Europe and elsewhere

Other markets have similar indices built on the same principle of implied volatility from index options:

• VSTOXX: based on options on the Euro Stoxx 50, the main blue-chip index of the euro area. It is the closest European equivalent to the VIX, and futures on it are listed on Eurex.
• FTSE 100 implied volatility: FTSE Russell publishes an implied volatility index for the FTSE 100, sometimes referred to as the VFTSE.
• Other volatility indices: Cboe also publishes volatility indices for other underlyings, such as the Nasdaq-100 and some commodities and currencies.

These indices often move together in a global sell-off, but each reflects option prices on its own market, so the levels are not directly comparable.

Common mistakes

• Treating the VIX as a directional forecast. It prices the size of expected moves, not their direction. A high VIX can be followed by a sharp rally as easily as a further fall.
• Assuming a VIX product tracks the index. ETPs and CFDs follow VIX futures. When spot jumps, futures may rise much less; when spot falls, products may keep losing value through roll costs.
• Holding long volatility for the long term. In contango, the roll drag accumulates. Products designed for short-term hedging can lose most of their value over months.
• Ignoring the tail risk of short volatility. Selling volatility can produce small, steady gains for long periods and then a large loss in a day, as the XIV episode showed.
• Forgetting leverage. Volatility CFDs are leveraged, and the products themselves move sharply. Losses can exceed what a beginner expects from a small margin deposit. Most retail CFD accounts lose money, and leverage magnifies that.
• Reading too much into small moves. A VIX rising from 13 to 14 is noise in most contexts. It is the size and speed of moves, and the level relative to recent history, that carry information.

Frequently asked questions

What is a normal level for the VIX?

There is no fixed normal level, but readings in the low to mid teens are generally associated with calm markets and readings above 30 with periods of stress. The long-run average sits somewhere in between. What counts as high or low depends on recent history: a jump from 12 to 20 can matter more than a drift from 25 to 28.

Can the VIX go to zero?

No. It would require options to price no movement at all, which does not happen. The lowest readings since the index began have been in the single digits for brief periods. Even in very calm markets, options carry some value because there is always a chance of a move.

Why does the VIX go up when stocks go down?

Because investors buy put options to protect their portfolios when shares fall, and that extra demand raises implied volatility. Sell-offs also tend to be faster and more volatile than rallies, which option prices reflect. The inverse relationship is strong on average but not perfect.

Can I buy the VIX like a share?

No. The VIX is an index calculated from option prices, so there is nothing to own. Exposure comes through VIX futures, options on VIX, exchange-traded products that hold futures, or CFDs based on futures. All of these behave differently from the headline index.

Why do VIX ETFs lose value over time?

Most hold a rolling position in VIX futures, and those futures usually trade above the spot VIX in calm markets. As each contract converges towards spot, its price drifts down, and the product has to sell the cheaper contract and buy a more expensive later one. That roll cost accumulates over months.

What does a VIX of 30 mean for the S&P 500?

It means options are priced for annualised volatility of about 30%. Dividing by the square root of 12 gives a one-standard-deviation one-month move of roughly 8.7%, and dividing by about 16 gives a typical daily move of roughly 1.9%. These are rough scales derived from option prices, not predictions.