What is the VIX index and how can it be traded?
April 7, 2025 by Hugo S Centurión
In the world of trading and investments, understanding market sentiment is key to making strategic decisions. One of the most important indicators for measuring fear or confidence among investors is the VIX index, also known as the 'fear index.'
What is the VIX?
The VIX index (Volatility Index) is an indicator that measures the expected market volatility over the next 30 days. It is managed by the Chicago Board Options Exchange (CBOE) and is based on the premiums of options on the S&P 500 index.
In simple terms: when the VIX rises, it means that investors expect more volatility (which is generally associated with uncertainty or fear in the market); when it falls, it is interpreted as an environment of calm or confidence.
How is the VIX calculated?
The VIX is constructed from the prices of a wide range of S&P 500 options. It uses a formula that analyzes market expectations regarding future volatility. It is not based on historical data, but on the implied volatility of options, making it a leading indicator of sentiment.
Why is it known as the 'fear index'?
Historically, the VIX tends to spike during times of financial crises, political uncertainty, unexpected macroeconomic events, or stock market crashes. For example, during the financial crisis of 2008 or the onset of the pandemic in 2020, the VIX reached extremely high levels, reflecting market panic.
How to trade with the VIX index?
The VIX cannot be bought directly, but there are various ways to trade based on its movements:
1. Futures on the VIX
They allow speculation on the future value of the index. They are complex products suitable for experienced traders.
2. ETFs and ETNs related to the VIX
There are exchange-traded products that replicate or follow the evolution of the VIX, such as VXX or UVXY. They are more accessible and popular among retail traders.
3. Options on the VIX
Like any other asset, options CALL or PUT can also be traded on the index.
Many traders use VIX-related products as a hedge against stock market declines, as they tend to rise when stock indices fall.
Advantages and risks of trading with the VIX
Advantages:
It allows anticipation of sharp market movements.
It is an effective hedging tool.
It offers trading opportunities in volatile markets.
Risks:
High technical complexity.
It can be very volatile and unpredictable.
VIX derivatives can have high rollover costs or suffer losses due to contango.
Conclusion
The VIX index is a powerful tool for traders who want to understand and anticipate market movements from an emotional and psychological perspective. However, trading products linked to the VIX requires a solid understanding of financial instruments and a clear risk management strategy.
If you are interested in taking advantage of market volatility, understanding the VIX is a fundamental step.
We are at 2020 levels; a good time to accumulate
