The VIX, often called the "Fear Index," measures expected volatility in the S&P 500 over the next 30 days. Created in 1993 by the Chicago Board Options Exchange (CBOE) and redesigned in 2003 by Professor Robert Whaley, it is calculated from the prices of a wide range of S&P 500 index options -- both puts and calls across multiple strike prices.
How It Works
VIX reflects the market's expectation of annualized volatility. A VIX of 20 implies the market expects the S&P 500 to move about ยฑ1.2% daily (20% รท โ252 trading days). The calculation uses a portfolio of out-of-the-money SPX options expiring between 23 and 37 days, weighted to produce a constant 30-day expected volatility. Higher VIX = more expected turbulence.
Key Levels
Historic VIX Spikes
Mean Reversion
The VIX is strongly mean-reverting -- it tends to spike sharply during panic selling but then gradually declines as fear subsides. This "volatility clustering" characteristic means VIX rarely stays above 30 for more than a few weeks. Historically, buying the S&P 500 when VIX exceeds 40 has been a highly profitable strategy over subsequent 12-month periods.
The VIX Term Structure
The VIX futures curve is normally in "contango" (longer-dated futures priced higher than near-term) reflecting the natural uncertainty of looking further into the future. When the curve flips to "backwardation" (near-term higher than longer-term), it signals acute near-term fear -- a condition that has coincided with major market bottoms.
Tradeable Products
VIX futures (launched 2004) and VIX options (launched 2006) on CBOE have become major instruments. VIX-linked ETPs like ProShares VIX Short-Term Futures ETF (VIXY) and inverse products generated enormous trading volumes. The "Volmageddon" event of February 2018 destroyed several inverse VIX products and led to significant regulatory scrutiny.
Market Impact
The VIX moves inversely to the S&P 500 roughly 80% of the time, but the relationship is asymmetric -- VIX rises faster on market drops than it falls on market rallies. VIX spikes often coincide with market bottoms, making it a useful contrarian sentiment indicator. Institutional investors use VIX levels to calibrate portfolio hedging strategies and risk budgets.