The Cboe Volatility Index (VIX) is often called the “Fear Gauge” or “Fear Index.” It calculates the expected volatility in the S&P 500 over the next 30 days. More specifically, the VIX measures the anticipated volatility in the market using a portfolio of options on the S&P 500.
Today’s VIX Chart
The VIX reflects investor sentiment and uncertainty, typically rising during periods of market stress or economic turmoil and falling during times of stability. For example, the VIX tends to spike when unexpected events occur, such as geopolitical crises or central bank policy changes, making it a useful barometer for market risk.
The original version of the Vix was introduced by the Chicago Board Options Exchange (Cboe) in 1993. Since then, the VIX has become a widely followed indicator of market sentiment.
The VIX itself is not directly investable, like all indexes. However, there are various exchange-traded products (ETPs), as well as futures or options contracts that allow investors to take a position.
VIX Levels & Historical Trends
All-Time High: 82.69 (March 16, 2020)
All-Time Intraday High: 89.53 (October 24, 2008)
Typical Range: 15–20 during stable markets
All-Time Low: 9.14 (November 3, 2017)
How the VIX Works
As mentioned earlier, the VIX is calculated using the prices of S&P 500 options, including both near and next-term put and call options with over 23 days and less than 37 days to expiration. When demand for options increases, reflecting higher expectations of volatility, the VIX rises. Conversely, when market participants are calm, the VIX decreases.
Because it is forward-looking, the VIX offers insights into market expectations of volatility but does not predict the direction (up or down) of stock prices.
Other Volatility Indexes
Whilst the VIX is the most well known of the volatility indexes, there are various others that track different markets or sectors. Volatility often moves across the market, but there are times when one part of the market is likely to have significantly greater volatility than others. The RVX is one example, often referred to as the ‘small cap VIX’ that tracks the Russell 2000 index. You can see various other below, along with the recent moves.
VIX Forecast
According to a recent research note from analysts at Morgan Stanley, US presidential election years “tend to bring cross-asset market volatility, and 2024 may be particularly volatile.” This is due to the potential for delayed election results as well as macroeconomic and geopolitical concerns.
“The potential for a delayed or contested election result depends on two primary factors,” said the bank. The first is said to be the speed of counting mail-in ballots in different states, with the second being the tightness of the race.
“This matters for investors, because delayed election results introduce a period of uncertainty and speculation, which historically has resulted in elevated levels of short-term market volatility,” stated the bank. “For example, the 2020 election saw a 40% spike in the CBOE Volatility Index (VIX), known as the stock market’s “fear gauge,” that lasted for three days post-election until a winner was officially declared.”
Meanwhile, JPMorgan said in an August report that “elevated interest in macro data will likely persist, which alongside the upcoming U.S. election, could mean more bouts of volatility through the rest of the year.” They advised investors that focusing on quality companies is a key strategy for managing future volatility.
In August, Bank of America stated that institutional investors used the early August market volatility as an opportunity to buy the dip in discounted stocks and equity ETFs. Outside of US markets, Mio Kato, Lightstream Research’s founder, told CNBC in September that volatility makes Japan’s small-cap space more attractive.
Our View: The VIX plays a critical role in understanding market sentiment, especially during times of uncertainty. However, the VIX is better used as a tool to assess market volatility and risk. Nevertheless, it is clear that the US election could cause a spike in the VIX and volatility in general, which is something to watch out for over the next few weeks.
Who Uses the VIX
The VIX is a valuable tool for several types of investors: Active traders, large institutional investors, and hedge fund managers
Portfolio Managers: Use the VIX to hedge against sudden market downturns using options or futures.
Institutional Traders: These traders use the VIX to gauge market sentiment and measure risk.
Risk-Averse Investors: Monitor the VIX to adjust exposure to equities during periods of elevated uncertainty.
Market Analysts: Track VIX movements as an indicator of sentiment shifts in global markets.
