The VIX is a measure of market risk, sometimes called the fear index. It is used to gauge investor sentiment – whether the broad stock market in the United States is bullish or bearish. VIX actually stands for volatility index. it is the ticker symbol for one of the volatility indexes created by the Chicago Board Options Exchange (the “CBOE”). In fact, the VIX is the most widely used volatility index, and was introduced by Duke University Professor Dr. Robert Whalley in 1993.
Volatility is the fluctuation in the market price of an underlying security. The VIX measures market expectations of near-term volatility conveyed by S&P500 near-term options prices. Specfically, the VIX presently is calculated by measuring the volatility of out-of-the-money put and call options on S&P500 stocks for the two nearest expiration months. It anticipates the volatility of the S&P500 over the next 30 days. A VIX of 30 means, roughly, that over the next 30-day period, the S&P500 will move 30% on an annualized basis (i.e., 8.66% over the next 30 days).
Typically, the VIX is inversely related to market tops and bottoms. For example, a high VIX implies pessimism and usually means a market is bottoming. Low values imply optimism. However, using the VIX solely to determine a market bottom or top doesn’t work because the method isn’t foolproof. However, there’s no cap on how high the VIX can go. Historically, a VIX reading of 30 has been a high number. but the VIX has traded over 70 in October, 2008. Consequently, It should not be used in a vacuum, but is best used with other indicators in order to provide investment guidance.
On March 26, 2004, the CBOE began offering futures contracts on the VIX for trading. On February 24, 2006, the CBE listed options on the VIX for trading.