FAQ on VIX, the “Fear Index”

  • Why do they call the VIX Index the “Fear Index” or “Fear Gauge”
    • Because the VIX almost always goes up when the market goes down. The scarier the decline the higher the VIX tends to go. In the worst part of the 2008/2009 bear market it went as high as 80. In strong bull markets it historically bounces between 10 and 15.
  • How can I get quotes for the VIX?
    • For Yahoo Finance use ^VIX
    • For Schwab use $VIX
    • For Fidelity use VIX
    • Google Finance use INDEXCBOE:VIX
    • For VIX options quotes—check your broker’s home page, Yahoo Finance (where they seem to come and go), or here
  • How can I buy or short the VIX Index?
    • You can’t short VIX directly.  It is a computed index like the Dow Jones Industrial Average, but instead of stocks this index is related to option prices on the S&P 500 index (SPX). As the options get relatively pricier the VIX index goes higher.
    • You can short VIX indirectly, with proxies that correlate fairly well with the VIX index.  See “Going short on VIX” for details.
  • Is there any way to speculate on the VIX?
    • You can buy options and futures on the VIX. I have not done futures trading on the VIX, but I have done VIX options. While not inherently riskier than options on stocks, these options have some unusual wrinkles and characteristics that you should know about. For example, the VIX options don’t follow the VIX itself, they follow the VIX futures that expires the same day they do.  In general the futures / options tend to not drop as rapidly as the VIX index itself, or climb as fast. This can be really frustrating! In addition the “spread”—the difference between the cost to buy and to sell is quite high on these options. This is never in your favor–this makes it harder to make a profit, but be aware you don’t have the pay the listed prices, you can often buy or sell close to the midpoint of these two prices.
    • There are also multiple ETNs (Exchange Traded Note) and ETFs that are intended to track the VIX index. See Volatility Tickers for a complete list. These trade like stocks (however sometimes they are hard to short).  VXX doesn’t do a particularly good job of tracking the VIX.  It doesn’t jump as much as the VIX in scary times, and structurally it is fated to lose value over time.   It is best suited for short term positions.  See “How to go long on VIX.
    • In addition, SVXY is an ETN that is designed to deliver 0.5X the inverse daily return of  VXX.  This is a good choice when you think the VIX index is going to drop.  See here for more information.
  • Why don’t VIX options track the VIX?
    • For a typical options marketplace to function the option market makers need to be able to buy or sell the thing the options are based on (this is called the “underlying”).  So far no one has figured out how to make the VIX index investible—it is a computed index that can’t be cost effectively replicated in the real world.   While technically not the underlying the VIX volatility futures behave as if they were the underlying security.   These volatility futures typically lag the VIX index in both directions, up and down.  This lethargy decreases as the future approaches expiration.
    • With 30 calendar days to go before expiration VIX futures will move about half the percentage moves of VIX. (e.g., if the VIX increases 4% the futures will probably move about 2%).
    • To track the price of the VIX options underlying future for a given month, look at the $10 strike call for that month, split the bid/ask price and add 10.  That will give you a good estimate of the current future’s price.
    • For more on VIX options see “Thirteen Things You Should Know About VIX Options“.


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2 thoughts on “FAQ on VIX, the “Fear Index””

  1. wouldn’t buying or selling SPX call and put options be equivalent to buying or selling the VIX? how come everyone always says there is no asset underlying the vix and that it can’t be traded directly? sure it can

    • Hi Ted, Replicating the VIX for a certain point of time (specifically VIX future expiration) is something that is done. Institutions do it but it requires hundreds of different options of various quantities. Taking that approach to replicate the daily moves of the VIX is not practical because you have to double the number of options held because you are interpolating between two options series and readjusting the mix every day. The transaction costs would be very high.


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