What is the VIX?
The VIX stands for the Volatility Index, an index formed by CBOE, the Chicago Board Options Exchange. It was originally introduced in 1987 as the Sigma Index.
The VIX is tracks the IV, implied volatility, of S&P 500 options and measures the market’s expected 30-day volatility levels. The implied volatility gives you a snapshot of the market’s opinion at the time.
Why is the VIX Important?
The VIX is used as a tool to gauge the market’s fear. As the S&P 500 becomes more unstable, the VIX spikes and vice-versa. Here is a chart of the VIX and the S&P 500, respectively, from 2008 to 2010. Leading up to 2009, the markets begin to crash. Investors are unsure of the future and have high levels of fear, so volatility spikes. From 2009 to 2010, the markets start to stabilize and the VIX does as well.
This index is given in percentage points and illustrates the expected annual movements of the S&P 500 at a 68% confidence level. This confidence level is used because 68% of the area under a standard normal probability curve is within 1 standard deviation of the mean. If the VIX is at 10, that means the annual change of the S&P 500 is expected to be +/- 10%.