We hear about the Cboe Volatility Index, better known as the VIX, quite a bit in the financial media and on cable financial news programs. What is the VIX, and how might it affect what you do as an advisor investing your client's assets in the face of continued market volatility?
What is the Cboe Volatility Index?
The Cboe Volatility Index, known as the VIX, is an index that tracks the near-term volatility of the S&P 500 index in real time. The VIX is run by the Chicago Board Options Exchange, or Cboe. The VIX is an index, not a tradable security. There are several VIX ETFs and ETNs that track the index. There are also futures and options on the VIX that can be traded as well.
The VIX is derived from the price of S&P 500 index options with near-term expiration dates. The VIX produces a 30-day forward-looking projection of the volatility of the index.
The VIX is a tool that investors use to gauge expectations of stock market volatility and investor sentiment over the next 30 days. The VIX is sometimes known as the fear index as traders and investors use the VIX to assess the level of fear and uncertainty inherent in the stock market.
What is the inverted VIX?
A chart of the VIX is usually an upsloping chart with longer dated futures contracts on the VIX trading at higher levels than those with a shorter-term maturity. In an inverted VIX situation, the spot price of the VIX futures would trade at a higher price than the three- and six-month futures.
The inverted VIX is taken to be a bullish sign of a market bottom by many experts. There have been several occurrences of the inverted VIX curve over the past year, and all of them coincided with market bottoms.
What are the highest VIX levels to date?
Aa of Feb, 2, the 52-week intraday high for the VIX index was 38.94. The 5- week intraday low was 14.10. Throughout most of its history dating back to 1993, the index has tracked in a range from 10 to 30.
In this context, the highest level the VIX has reached to date was 82.69 on March 16, 2020. This surpassed the previous high of 80.74 set on Nov. 21, 2008, at the height of the financial crisis.
On March 16, 2020, the S&P 500 closed just below 2,305, just shy of its low point during the market decline at the outset of the pandemic. After that, the S&P staged a nice gain though the end of 2020 and through 2021, reaching a number of highs.
Is VIX a leading or lagging indicator?
The VIX is a forward-looking index. It is a leading indicator of the potential risk inherent in the S&P 500, and by proxy in the stock market. It is also a leading indicator of the level of fear that investors and traders have toward the market in the near term.
(Source: Morningstar) 
