The VIX is a volatility index created by the Chicago Board Options Exchange (CBOE). This index was the first to measure market expectations based on market volatility. This index is closely followed by all investors since it provides very important data regarding the possible direction that the markets may take in the future. Let's see what the VIX volatility index is and how we can interpret it.
What is the VIX volatility index.
The VIX is a volatility index created by the Chicago Board Options Exchange (CBOE). This index was the first in measure market expectations based on its volatility. Of course, this index shows the S&P 500 implied volatility for the next 30 days. The VIX values are calculated using the option values of the S&P 500 index and show us values expressed in percentages ranging between 0 and 100. To a large extent it allows us to measure market sentiment, but it is not suitable for short-term operations such as scalping or intraday trading. Although the VIX only measures the volatility of the S&P 500 index, it is popularly used to determine the volatility present in other markets such as stocks, raw materials or others. This index is popularly known as the “fear and greed index”.
How to interpret the VIX volatility index.
Interpreting the values shown by the VIX is very easy. Simply observe if the value of the VIX increases, the S&P 500 is likely to fall, while if the value of the VIX decreases, the S&P 500 is likely to remain stable. There are certain levels to take into account when observing the movements of the VIX:
- Between 0 and 20: or little volatility In the market, investors have confidence in it and the S&P500 is initially in an upward trend.
- Between 20 and 30: Start to increase concern among investors, which translates into an increase in volatility. This may cause a continuation of the S&P trend or its counterpart may begin to reverse.
- Between 30 and 100: Start to Panic emerges in investor sentiment. This is because volatility is beginning to increase noticeably and we may be close to a strong corrective movement or a collapse in the prices of the S&P 500, which consequently, may cause collapses in the prices of other indices or classes of stocks. assets.
VIX volatility levels can be measured like a traffic light. Source: Tradingview.
What is the VIX volatility index used for?
As we have mentioned in previous paragraphs, the VIX allows us to measure market sentiment through the implied volatility of the S&P 500 index. It has popularly been used to be able to determine support and resistance levels in the markets. As we mentioned at the beginning of this article, this index is popularly known as the "fear and greed index" and this is because it allows us to detect the moments in which the Panic or greed take over the markets. For example, readings above the value of 40 points are linked to very notable events that have strongly shaken the markets. These events are:
- In 1998, the VIX exceeded 40 points when Russian financial markets collapsed, causing panic among investors.
- In 2001 the tragedy of the September 11 attacks in the USA, which consequently caused the price of the VIX to rise above 40 points.
- In 2002 a series of financial scandals that Enron began, leading the VIX to remain above 40 points again for almost four months, between July and November of the same year.
- In 2008 with the outbreak of the financial crisis caused by the real estate sector led the VIX to climb to 80 points during the month of October of that same year.
- In 2020 during the two most intense months of the Covid pandemic The VIX remained above 40 points, reaching above 80 points.
Historical values of the CBOE volatility VIX index. Source: CBOE.