Built from options on the S&P:the VIX gauges expected volatility.
The CBOE Volatility Index, often called the “fear gauge”, measures expected market volatility.
Forex traders watch the VIX because higher volatility often leads to increased currency market movements.
In plain words
The VIX is an index published by the exchange group Cboe that estimates how much the US share market, measured by the S&P 500 index, is expected to move over the next 30 days. It is calculated from the prices of options on that index: when traders pay more for protection against large moves, the VIX goes up.
See it move
Stage 2 of 3: Calculation
Why it matters
It is widely used as a shorthand for nervousness in markets, hence the nickname “fear gauge”. Currency traders watch it because periods of stress in shares have often coincided with larger moves in currencies, although the VIX measures shares and not currencies.
Worked example
An example only. The figures are round and invented for the arithmetic: they are not market prices.
The VIX reads 16, a figure expressed as an annual percentage.
- 1A reading of 16 means expected movement of about 16% over a year.
- 2A year has about 252 trading days, and the square root of 252 is about 15.9.
- 3Daily equivalent16 ÷ 15.9 is about 1.
A VIX of 16 corresponds to a typical expected daily move in the S&P 500 of roughly 1%, up or down.
A common mistake
The VIX does not point up or down. It estimates the size of expected moves, not their direction, and it describes expectations, which can prove wrong.
Check yourself
Educational information, not investment advice or a recommendation to trade.