How to Read the VIX (Fear Index)

The VIX is an index calculated by the Chicago Board Options Exchange (CBOE) in the United States. It extracts from S&P 500 option prices the market's estimate of 'how much it expects prices to swing over the next 30 days.'

The key point is that it reflects not the 'past' but 'future expectations.' Rather than volatility that has already passed, it turns the 'anxiety about what lies ahead'—embedded in the prices investors are currently paying for options—into a number.

When anxiety grows, people pay more for insurance-like options, and that pushes the VIX up. That's why it got the nickname 'fear index.' Strictly speaking, though, it's less 'fear' than 'expected volatility.'

The VIX is expressed as an annualized percentage. To get a rough feel:

- Below 20: considered a relatively calm market. - 20–30: a range where anxiety is building. - 30 or above: considerable stress. Above 40–50 it is often a crisis phase.

Historically the VIX has moved around roughly 19–20 on average, but this 'average' varies by period, so don't treat it as an absolute benchmark.

There have been extreme cases too. During the 2008 financial crisis the VIX topped 89 intraday, a record-high level, and during the 2020 COVID crash its close topped 82, putting the two crises shoulder to shoulder.

The VIX is useful, but it's also widely misunderstood.

First, the VIX does not tell you 'direction.' A high VIX only means 'a large move seems likely'—it doesn't say whether prices will rise or fall. That said, in practice the VIX tends to spike when the market plunges (it generally moves opposite to stock prices), which is why it's called the 'fear index.'

Second, the VIX has a strong tendency to revert to its mean (mean reversion). A VIX that surges during a crisis tends to come back down over time.

Third, you can't buy the VIX itself. Products that claim to track the VIX (futures, ETNs, etc.) move differently from the index because of roll costs and can incur large losses if held long-term, making them especially risky for beginners. This article does not recommend such products.