The use of the VIX measures how much market participants expect the stock market to fluctuate in the future. Armed with this information, participants have an idea of what to expect from the market within the next 30 days in the market. The VIX is essentially a gauge of investor sentiment and fear in the market.

Or if you feel ready, skip this stage and open a live account to get started. World events in recent years clearly demonstrate how the index works in mirroring the market sentiment​ — that is, doing the exact opposite of — the S&P 500 and other stock indices. For example, when the Covid-19 crisis hit, the VIX soared to $82, surpassing even the previous high of $80.86 recorded during the financial crisis of 2008.

How to Trade the VIX

It’s often referred to as the ‘fear gauge’ because it measures how much investors expect the price of the S&P 500 index to fluctuate over the next 30 days. VIX is a market index that measures the implied volatility of S&P 500 index options. Futures are contracts that agree to exchange a certain price for VIX at a future date.

Some of these indices were leveraged, resulting in even sharper fluctuations and providing riskier opportunities for profits and losses. The peak in March 2020 as Covid-19 took hold across the world coincided with the sharpest fall in the S&P 500’s history. Another how to trade the vix example of a significant spike in volatility occurred in March 2022. In the days after Russia invaded Ukraine, the S&P fell to its lowest level since the peak of the Covid-19 crisis, lifting the VIX futures index simultaneously to hit a two-year peak. The VIX index is a popular measurement for traders to quickly judge market volatility.

VXX is ideal if you expect short-term spikes in volatility and want to amplify potential gains. Spread trading involves simultaneously buying and selling different VIX derivatives to create a specific risk-reward profile. The VIX stayed relatively calm for much of 2024, typically in the mid-teens to low 20s. The notable exception was early August 2024, when a sudden unwind of a yen-carry-trade strategy sent the VIX shooting to an intraday high near 65.

Why is the VIX Index called the ‘Fear Index’?

Find out what we’re seeing in the world of unusual options activity — in tickers across the market, from the VIX, to AAPL, to little-known stocks, with our Unusual Options Activity service. Our favorite strategy of all time to trade the VIX is to follow the smart money. In short, consider your risk tolerance, time horizon, and market outlook. Then decide whether you’ll be buying calls or puts, using spreads or straddles, or something else.

Implied Volatility Expectations

The VIX volatility index is known by other terms such as the ‘fear gauge’ or ‘fear index’. For traders, it provides an efficient method to judge market risk, fear and uncertainty when making trading decisions. As it essentially measures uncertainty, the VIX volatility index is an appropriate name. Investors use the VIX to predict stock market volatility, which has become a significant part of many trading strategies.

Can Investors Invest in VIX?

By monitoring global events, employing technical analysis, and staying informed about market trends, investors can navigate the complexities of VIX trading effectively. Typically, the VIX spikes during market downturns as investors anticipate increased volatility. Introduced by the Chicago Board Options Exchange (CBOE) in 1993, the VIX has evolved to become a standard for measuring market volatility.

For instance, if you’re investing in ETFs, it would be the best investment for the short term. This is because the VIX Short-Term Futures ETF (UVXY) is designed for those looking for short-term gains with daily rebalancing. The market is highly volatile, and it’s easy to lose money when uncertainty hits the market when investment is in the long term.

  • Because there is an insurance premium in longer-dated contracts, the VXX experiences a negative roll yield, also known as backwardation, meaning long-term holders will see a penalty to returns.
  • This means you need to consider which direction the market is going, how volatile it has been, and how long until it expires.
  • Trading the VIX can be complex and may not be suited for all beginners.
  • The VIX itself is an index, and like other market indexes, you cannot trade it directly.

If you hold a derivative contract until it expires, you don’t have to pay interest. In some cases, however, you may be required to pay interest if your position is ‘out of the money’ by the time it expires. This can happen when an option position has lost value and is no longer worth anything because the stock price hasn’t moved as much as expected. Increases in interest rates will cause a decrease in the value of stocks, as investors will be willing to take on less risk.

  • Additionally, the VIX can be used as a hedging tool against market volatility and unexpected events.
  • Major economic events or geopolitical crises drive volatility expectations.
  • Volatility index trading strategies offer exciting opportunities for traders to profit from market fluctuations and enhance their overall portfolio performance.
  • The VIX is essentially a gauge of investor sentiment and fear in the market.
  • Put another way, volatility is a constant companion to investors, which is why the Cboe Volatility Index (VIX) is so widely tracked.

In sum, trading the VIX offers a unique way to engage with market volatility, providing opportunities for both hedging and speculation. For day and swing traders, the VIX can be an ideal speculation asset, especially when the markets are in crash mode and there’s panic. This unique characteristic makes VIX options a powerful tool for traders looking to capitalize on anticipated changes in market volatility. In early April 2025, following aggressive U.S. tariff announcements, the VIX surged to 52.33 (its highest closing level in five years).

When market fear increases, the VIX tends to rise, and when markets are calm, the VIX usually falls. This relationship makes the VIX a valuable tool for traders looking to hedge their portfolios or speculate on market volatility. The VIX is often called the “fear index” because it tends to spike during periods of market uncertainty or turmoil. However, it’s important to note that the VIX doesn’t measure current volatility, but rather the market’s expectation of future volatility.