What is Vix – the fear index?

What is Vix? We explain how the fear index could guide your investment decisions.

stressed businessman sitting on the walkway in panic digital stock market financial background
(Image credit: Getty Images)

One trading indicator that is very popular during moments of market uncertainty is the CBOE Volatility index, which is sometimes known as Vix or even called the “fear index”. Vix is calculated from the price of 30-day call and put options on S&P 500 futures traded on the Chicago Board Options Exchange.

Call options give you the right, but not the obligation, to buy a specific asset at a set price at a set time, while put options give you the right to sell. In other words, it gauges the cost of taking out insurance against price moves in either direction: the greater the cost, the bigger the implied volatility. The index’s long-term average is around 21.

However, while the formula for working out Vix is pretty straightforward, traders don’t agree on how to interpret it. The simplest view is that the higher the Vix, the more volatility traders expect, and the more you should think about selling. However, contrarian investors argue that a high Vix can be a sign that people may be too cautious, which in turn suggests that it is time to buy. 

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Because Vix itself can be extremely volatile, many people prefer to take a rolling average rather than the daily figure. There have been two key studies on using Vix as a trading indicator. One, by Duncan Lamont of asset management group Schroders, found that a switching strategy based on moving into bonds when the Vix exceeded 35 would have lagged the market, returning 7.6% between 1990 and 2020 compared with 9.9% earned from staying fully invested. But Butler University found that while switching would have lowered the raw return in most cases, it would have cut volatility by even more, leading to a risk-adjusted excess return.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

Related articles

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri