In addition to being an index for measuring volatility, traders can also trade VIX futures, options, and ETFs to hedge or speculate on changes in the index’s volatility. The VIX has paved the way for volatility to be used as a tradable asset, albeit through derivative products. VIX values below 20 generally represent more stable, less stressful periods in the markets. The CBOE Volatility Index (VIX) is a real-time index that presents market expectations in terms of the relative strength of short-term price changes for the S&P 500 Index (SPX).
Active traders, large institutional investors, and hedge fund managers use VIX-linked securities to diversify their portfolios, as historical data shows a strong negative correlation of volatility with equity market returns, meaning that when stock returns fall, volatility rises and vice versa.
What is a normal volatility index?
Although the VIX mostly measures the volatility of the S&P 500, it is often used as a benchmark for the wider market. In this case, the general market could have lower volatility and higher security prices as investors trade with more confidence. Although there is no such thing as a normal VIX level, there is a level that is generally considered normal. The expected monthly, weekly, or daily volatility can be calculated from the annual expected volatility.
The VIX volatility index provides information on how financial professionals assess short-term market conditions.
What does a VIX of 20 mean?
A VIX number of 20 means the volatility of the market is average. This means stock prices rise and fall by as much as they do in an average trading session. Sometime, the VIX can send wrong signals, as it can turn from a low number to a high number in a very short period of time. During the crisis, the VIX wanted us to believe that everything is fine and that the S&P 500 index has a very low probability of making radical moves. However, the VIX was wrong and has risen again. That one VIX figure gives us a general idea of whether investors are paying more or less for the right to buy or sell the S&P 500 index. It should be noted that these are rough guidelines. Unexpected events can shake markets and a low VIX level today could be followed by a period of extreme volatility should circumstances change. The VIX is a number derived from option premium prices in the S&P 500 index (an index that includes 500 large-cap stocks).
More about the Volatility 75 Index
If you want to learn more about the VIX, you can check the following website dedicated to VIX trading: