Cboe Volatility Index (VIX)

The Cboe Volatility Index is a benchmark index, published by Cboe Global Markets, that estimates the volatility market participants expect in the S&P 500 over the coming 30 days, inferred from the prices at which S&P 500 index options are quoted. Cboe's own description is that it "is a leading measure of market expectations of near-term volatility conveyed by S&P 500 Index (SPX) option prices," and that it has been published since 1993. Cboe elsewhere states the purpose more precisely: the index "is intended to provide an instantaneous measure of how much the market thinks the S&P 500 Index will fluctuate in the 30 days from the time of each tick."

Almost nobody calls it by that name. The ticker, VIX, is what appears in headlines and on screens, and Cboe uses "VIX Index" itself. The formal name is used here because it is the sponsor's own, and because the words in it, Cboe, volatility and index, each say something a reader needs: it is published by one exchange group rather than by a regulator, it measures dispersion rather than direction, and it is an index rather than an investable security.

The measurement the index applies to the S&P 500 specifically is covered in general on our page for implied volatility, and volatility as a statistic is covered on our page for volatility. This page is about the index as an object.

How it is built, and why the construction explains most of its behavior. Cboe calculates the index from the midpoints of real-time SPX option bid and ask quotes. Its published answer on the inputs is specific: only SPX options with Friday expirations are used, and only those "with more than 23 days and less than 37 days to the Friday SPX expiration," which are then "weighted to yield a constant maturity 30-day measure of the expected volatility of the S&P 500 Index." Intraday values are struck from snapshots of those quotes every 15 seconds. So the index is not a price and is not an average of prices; it is a quantity extracted from a continuously changing set of option quotes.

That construction is also the reason it cannot be held, which is the single most consequential fact about it for an ordinary investor. Cboe answers the question directly: "unlike the S&P 500 Index that is comprised of a relatively stable portfolio of stocks, the VIX Index is priced using a constantly changing portfolio of SPX options," and "in order to maintain a constant maturity of 30 days, the portfolio of SPX options comprising the VIX Index changes slightly every single minute." The consequence Cboe draws is that "traders cannot buy and hold a portfolio of the constituent SPX options of the VIX Index because traders would need to rebalance the portfolio continuously in order to track the VIX Index through time." There is no index fund for this index, and the reason is structural rather than commercial.

What can be traded is a set of derivatives on it, and they are separate instruments with their own prices. Cboe Futures Exchange has listed VIX futures since 2004, and also lists Mini VIX futures at one tenth the standard contract size; Cboe lists VIX options and options on VIX futures. Volatility derivatives generally expire on Wednesday mornings, and their settlement value is calculated from SPX options in a special opening auction rather than from the spot index at that moment. Their prices reflect what participants expect the index to be at their own expiration, which is a different question from what it is today.

FINRA has stated the practical consequence of that gap in its own words, and it is the warning to carry away from this page. In its guidance on complex products, FINRA notes that "the investable form of volatility may be in the form of futures on the CBOE Volatility Index (VIX) that reflect the market's expectation of volatility," and that "some investors may not understand that the product's return may not be based on VIX fluctuations actually experienced on a given day, but on the market's expectation of future volatility." An exchange-traded product built on VIX futures therefore does not promise to deliver the index's move, and over time it can move a long way from it.

Why the gap is persistent rather than random. Cboe describes volatility as mean-reverting, saying its level "is expected to trend toward a long-term average over time," and calls that property "a key driver of the shape of the VIX futures term structure and the way it can move in response to changes in perceived risk." Because a fund holding futures must keep replacing an expiring contract with a later one, the relationship between the two prices decides whether that replacement is done at a gain or a loss, repeatedly. The two shapes that relationship can take, and what each does to a position that has to roll, are covered on our pages for contango and backwardation.

The "fear gauge" nickname is popular and it is half right. The index does rise when participants pay more for protection, and Cboe notes that the index has "had a historically strong inverse relationship" with the S&P 500, which is why the nickname stuck. But what the index measures is expected magnitude, not expected direction, and the same construction that lifts it before a feared crash lifts it before any wide range of outcomes. Reading a high level as a forecast that prices will fall reads a directional claim into a number that contains none, a point our page on volatility already makes about implied measures generally.

Cboe takes the bid and ask quotes on SPX options in a window straddling 30 days to expiration, uses the midpoints, and combines them into a single figure representing the expected 30-day volatility of the S&P 500. That figure is republished every 15 seconds during Cboe's global trading and regular trading hours. Anyone wanting exposure to it buys a futures contract, an option, or a fund that holds those, none of which is the index.

A hypothetical illustration of why a fund built on VIX futures can lose money while the index rises. Suppose the spot index reads 15.00. The front-month VIX futures contract trades at $16.00 and the following month's at $20.00, because participants expect the index to be higher by then.

A fund holds 1,000 units of the front-month contract at $16.00, a position worth $16,000.00. As that contract approaches expiration, the fund must roll: it sells its 1,000 units and buys the next month at $20.00. The same $16,000.00 now buys 800 units ($16,000.00 divided by $20.00).

A month later, suppose the spot index has risen to 16.00, a full point above where it started, and the contract the fund now holds is expiring, so it settles at that level. The position is worth 800 times $16.00, or $12,800.00. The fund has lost $3,200.00 on an index that went up. The effect reverses when the later contract is cheaper than the nearer one, in which case the roll adds units instead of removing them. All figures are illustrative, and the two curve shapes are covered on our pages for contango and backwardation.

What the index is good for

• It compresses the option market's view of the next month into one number that is published continuously and computed the same way every day.
• It is forward-looking, so it registers a change in expectations immediately rather than after prices have moved.
• Its methodology is published by the sponsor, including the exact expiration window used, so the figure can be interrogated rather than taken on trust.
• Its historically inverse relationship with the S&P 500 makes it a compact read on how nervous the equity option market is.

Where it misleads

• It cannot be held. Every practical exposure to it is a derivative or a fund holding derivatives, and those are different instruments with different prices.
• FINRA warns specifically that such a product's return may track the market's expectation of future volatility rather than the index's actual movement on the day.
• A fund that must keep rolling futures contracts can lose value over time even when the index is flat or higher, depending on the shape of the futures curve.
• The "fear gauge" nickname invites a directional reading of a number that measures expected magnitude in both directions.
• It measures the S&P 500 specifically, so it says nothing directly about a portfolio holding small companies, bonds, or non-US equities.
• A level is only meaningful against its own history, and there is no threshold at which a reading becomes a signal a household can act on.