How is VIX calculated

VIX (CBOE Volatility Index) - definition & calculation

Example of the interpretation of VIX

When the market prices fall, it can be observed that the market participants' need for hedging increases. For reasons of increasing nervousness or the intention to secure profits, options are increasingly in demand. Due to the increased demand, the option prices generally rise, which is then also reflected in a higher VIX. The opposite is the case with rising prices. Here the nervousness of investors decreases and the need for hedging decreases, which is why the option prices fall again and with them the VIX level.

This regularity can be clearly seen in a comparison between the VIX and the S&P 500. In bull markets, the S&P 500 rises, whereas the VIX is largely trading at a low level. The development of the two graphs is almost opposite. After price drops and corrections, for example in 2009, from April 23, 2010, from July 25, 2011, etc. (see chart), the VIX skyrockets. However, no clear conclusions can be drawn regarding the strength of a price slide and the corresponding reaction of the VIX. In some cases, the volatility index can also react very clearly on the basis of a trend towards lower price declines (see, for example, January 23, 2018).

Measured in terms of absolute, historical values, a VIX value of over 20 indicates a more volatile stock market environment. The uncertainties in the market and thus those of investors are comparatively great (although the uncertainty need not be justified). Values ​​below 15, on the other hand, indicate more relaxed market phases in which prices usually develop with very little fluctuation.