You can hear about it frequently in financial news, but still many people are not sure what the VIX index exactly is. This page explains it.
Short Answer: What Is VIX?
VIX is the ticker symbol of CBOE Volatility Index. The index measures 30-day implied volatility of S&P500 index options.
Here you can see a chart of VIX in the last 10-12 years.
While VIX itself can’t be traded (it’s just a number), you can trade VIX options or VIX futures. VIX is a very specific market to trade. The specific characteristics, ways to trade the VIX, and possible sources of trading ideas are summarized here: Trading the VIX.
If you have found unfamiliar terms in the short answer above, you may first want to see the explanations that follow on this page before reading more about trading the VIX.
What Is a Ticker Symbol?
Securities traded in financial markets have various names. Sometimes the names are long and complicated and sometimes there are several different versions of a name used for one particular security. At the same time, especially in the age of electronic trading and fast financial innovations, there must be a clear way to identify a security and distinguish it from others. That is the function of a ticker symbol. A ticker symbol (or just “ticker”) is usually a group of a few (usually 1-4, but occasionally more) letters (and sometimes digits), just like an abbreviation. For example, the ticker symbol of S&P500 stock index is SPX, the ticker of Microsoft stock is MSFT, and the ticker of corn futures is C. Similarly, the ticker symbol of CBOE Volatility Index is VIX. Some securities are better known by their tickers than by their actual names – that is also the case of CBOE Volatility Index, often called the VIX.
What Is CBOE?
CBOE stands for Chicago Board Options Exchange, an options exchange located in Chicago. This is the official website of CBOE.
What Is an Options Exchange?
An options exchange is just like a stock exchange – a place (or a network of computers in these days) where stocks are traded – but instead of stocks there are options traded on an options exchange.
What Is an Option?
Option is a derivative security that represents a right, but not the obligation, to buy (call option) or sell (put option) the underlying security at a specific price (called strike price). More detailed explanation is available here: What Is an Option?
What Is a Volatility Index?
Volatility index measures volatility, just like a stock index measures stock prices.
What Is Volatility?
Volatility is the variability of security prices or (more precisely) returns. Generally, high volatility means that a security (e.g. a stock) makes big moves and the moves are very different over time (e.g. one day it rises by 5%, the next day it falls 7% etc.). Low volatility means that a security makes small moves (e.g. one day it goes up by 0.5%, the next day declines by 1%, and some other day its price may even remain unchanged) or that it makes big moves, but very similar over time (e.g. one day it rises by 4.5%, the next day it rises by 4.7% etc.). Mathematically, as most option traders and option pricing models understand it, volatility is standard deviation of returns. You can find more detailed explanation here: Price Volatility.
Option Prices and Implied Volatility
Volatility is closely related to options. If volatility is high, options are more valuable. If it’s low, the benefits of holding options (and therefore also the prices of options) are lower. If traders expect high future volatility, options are expensive. If traders expect low future volatility, options are cheap. The volatility that market expects in an upcoming period can be estimated from option prices (you can try it on your own here). Such volatility – implied by option prices – is called implied volatility.
So What Is VIX?
VIX is a volatility index that measures the volatility of S&P500 Index returns expected in the next 30 days and priced (implied) in S&P500 options.
Continue to Trading the VIX.