Instead, investors can take a position in VIX through futures or options contracts, or through VIX-based exchange-traded products (ETPs). For example, the ProShares VIX Short-Term Futures ETF (VIXY) and the iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX) are two such offerings that track a certain VIX-variant index and take positions in linked futures contracts. The VIX provides valuable insights into market sentiment and anticipated volatility. A diversified strategy and thorough market research remain crucial for navigating the ever-changing financial landscape. There are a range of different securities based on the CBOE Volatility Index that provide investors with exposure to the VIX.
- When the VIX declines, investors are betting there will be smaller price moves up or down in the S&P 500, which implies calmer markets and less uncertainty.
- VIX values below 20 generally correspond to stable, stress-free periods in the markets.
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- As an investor, if you see the VIX rising it could be a sign of volatility ahead.
About Volatility S&P 500 Index
The reverse is true when the market advances—the index values, fear, and volatility decline. Get stock recommendations, portfolio guidance, and more from The Motley Fool’s premium services. Investing in the VIX directly is not possible, but you can top 10 front end developer skills you need to know purchase ETFs that track the index as a way to speculate on future changes in the VIX or as a tool for hedging.
Historical VIX levels
Consider combining VIX analysis with fundamental and technical analysis to gain a more holistic perspective. Remember, market conditions are dynamic and best position trading strategies influenced by a myriad of factors beyond the VIX. Experts understand what the VIX is telling them through the lens of mean reversion.
Downside risk can be adequately hedged by buying put options, the price of which depends on market volatility. Astute investors tend to buy options when the VIX is relatively low and put premiums are cheap. As a rule of thumb, VIX values greater than 30 are generally linked to large volatility resulting from increased uncertainty, risk, and investors’ fear. VIX values below 20 generally correspond to stable, stress-free periods in the markets.
What Is the CBOE Volatility Index (VIX)?
During its origin in 1993, VIX was calculated as a weighted measure of the implied volatility of eight S&P 100 at-the-money put and call options, when the derivatives market had limited activity and was in its growing stages. Perhaps the most straightforward way to invest in the VIX is with exchange-traded funds (ETFs) and exchange-traded notes (ETNs) based on VIX futures. As exchange-traded products, you can buy and sell these securities like stocks, greatly simplifying your VIX investing strategy. It’s important to note here that while volatility can have negative connotations, like greater risk, more stress, deeper uncertainty or bigger market declines, volatility itself is a neutral term. Greater volatility means that an index or security is seeing bigger price changes—higher or lower—over shorter periods of time.
Practical Applications for Investors
The VIX index tracks the tendency of the S&P 500 to move away from and then revert to the mean. When the stock markets appear relatively calm but the VIX index spikes higher, professionals are betting that prices on the S&P 500—and thereby the stock market as a whole—may be moving higher or lower in the near term. When the VIX moves lower, investors may view this as a sign the index is reverting to the mean, with the period of greater volatility soon to end.
The second method, which the VIX financial spread betting companies top 10 brokers uses, involves inferring its value as implied by options prices. Options are derivative instruments whose price depends upon the probability of a particular stock’s current price moving enough to reach a particular level (called the strike price or exercise price). In addition to being an index to measure volatility, traders can also trade VIX futures, options, and ETFs to hedge or speculate on volatility changes in the index. While there’s no universally agreed-upon “high” or “low” VIX level, historical data provides context. Readings above 30 are generally considered high, suggesting significant market uncertainty. However, these are guidelines, and interpretation should always consider the broader economic and geopolitical landscape.