Cboe Volatility Index (VIX) or the Fear Index: Explanation and Calculation

The Cboe Volatility Index, better known by its ticker symbol VIX and often called the market’s “fear gauge,” measures the market’s expectation of future volatility based on S&P 500 index options. It’s a crucial tool for investors and market watchers to gauge the turbulence of the financial markets.

“[The VIX] forces us to do what we know we’re supposed to do as investors, which is, add low, trim high, a version of buy low, sell high. And often, when left to our own devices, we don’t do that,” said Liz Ann Sonders, managing director and chief investment strategist at Charles Schwab.

The value of the VIX has no upper limit, but its average value was just above 19 from 2015 to 2025. Amid market turmoil set off by the Trump administration’s tariff announcements, the VIX closed at 52.33 on April 8, 2025—the highest level since closing at a record high of 82.69 on March 16, 2020, during the COVID-19 pandemic. The index jumped to 60 at one point during intraday trading in April 2025, but it never reached the intraday record of 89.53 set in October 2008.

Below, we’ll take you through how the VIX is computed, what it represents, and why it’s an indispensable tool for investors and policymakers alike.   

Understanding the Cboe Volatility Index

The Cboe Volatility Index doesn’t measure volatility like other indicators. Rather than look at past price fluctuations, the VIX looks at expectations of future volatility, or implied volatility. Times of greater uncertainty, with investors expecting more volatility, have higher VIX values, as can be seen in the chart below.

Cboe Global Markets introduced the VIX in 1993. At the time, the index only considered the implied volatility of eight separate S&P 100 put and call options. After 2002, Cboe based the VIX on S&P 500 options to better capture market sentiment. VIX futures were added in 2004, and VIX options followed in 2006.

How the VIX Works and How It Is Used

The VIX is a gauge of the S&P 500’s expected volatility—how much prices will swing up or down—over the next 30 days. But the VIX’s values—the numbers you see—express an expected annualized volatility. For example, if the VIX shows a reading of 22, that means that there is a 68% probability that the S&P 500 trades within a range of +/- 22% over the next year. (The 68% probability represents one standard deviation.)

In more practical terms, the VIX uses option prices to estimate how volatile the market will be in the coming month, and then extrapolates that to the next 12 months. It looks at both put and call options on the S&P 500 index, focusing on those with strike prices near the market level and expiration dates coming soon. The prices of these options reflect traders’ expectations of future market movements.

The VIX as Warning Sign

Investors, analysts, and portfolio managers look to the VIX to measure market stress before they make decisions. When the VIX is higher, this indicates greater expected volatility, which generally correlates with market fear. Market participants are more likely to pursue lower-risk investment strategies in such situations.

VIX values above 30 are typically associated with significant volatility, often resulting from heightened uncertainty, fear, or economic turmoil. Values below 20 generally correspond to more stable, less stressful periods. However, these broad guidelines vary based on the specific market.

Using the VIX to Rebalance

The VIX is useful for more than gauging market sentiment. Sonders said the VIX can be used for portfolio rebalancing and risk management. We tend to want to continue our winning streaks and keep assets as they continue upward, until they become “an outsized portion of the portfolio,” she said. When it’s time for a correction, “you’re holding a much heavier bag than you otherwise would have.”

The VIX can help with rebalancing, Sonders said. When the VIX is high, indicating increased market fear, it might signal a chance to add to positions at lower prices. Conversely, when the VIX is low, suggesting market complacency, it might be time to trim positions that have grown too large.

“It’s really simple, basic stuff,” she said. “But it’s so important to hammer home, especially when you have all these rotations,” that is, movements of investments from one sector to the next. These “frankly give you more opportunity to use volatility to your advantage via that process of rebalancing.”

Calculating the VIX

Calculating the VIX is complex but can be simplified by breaking it down into steps. Here’s a simplified guide to understanding the process:

1. Select the Relevant Options

• Choose S&P 500 Index options with expiration dates between 23 and 37 days.
• Focus on near-the-money and out-of-the-money (OTM) call and put options.
• If no option is exactly 30 days from expiration, use an interpolation between the two nearest expiration dates.

2. Calculate the Implied Forward Level of SPX

• Determine the prices of OTM calls and puts.
• Find the strike price where the difference between call and put prices is the least.
• This gives you the implied forward price of the S&P 500.

3. Determine the Relevant Strike Prices

• Select strike prices where both call and put options are available.
• Start with the strike price closest to (but not above) the forward level calculated in step 2.
• Include all strikes below this level for puts and all strikes above for calls.

4. Calculate How Much Each Strike Contributes to Variance

• For each selected strike price, compute its contribution using the formula: (ΔK×2×(e^RT)×Q(K))/K^2.

Where:

• ΔK is the difference between successive strike prices
• Q(K) is the midpoint of the bid-ask spread of the option price
• K is the strike price
• R is the risk-free interest rate
• T is the time to expiration

5. Sum the Variances

Add up all the individual variance contributions from step 4.

6. Annualize the Variance

• Multiply the summed variance by 365/30 to annualize it (assuming a 30-day period).

7. Calculate the VIX Value

• Take the square root of the annualized variance.
• Multiply this result by 100 to express it as a percentage.

The result is the VIX value, representing the market’s expectation of 30-day volatility.

Volatility as a Tradable Asset

Traditionally, volatility was viewed merely as a measure of market risk. However, in recent decades, new financial products have transformed volatility into an asset that can be traded. This shift began in earnest with the introduction of VIX futures in 2004 and VIX options in 2006 by the Chicago Board Options Exchange.

Volatility is primarily traded through financial instruments such as swaps and futures. These instruments allow investors to gain exposure to volatility, making it possible to manage risk more effectively or to capitalize on expected changes in market conditions without directly holding the underlying assets.

Key Volatility Products

• VIX futures: These contracts allow traders to speculate on future levels of expected market volatility.
• VIX options: Like traditional options, these derivatives give holders the right (but not obligation) to buy or sell the VIX at a preset price.
• Volatility Exchange-Traded Funds (ETFs): These include ETFs that track VIX futures, providing easier access for retail investors to gain exposure to volatility.
• Variance swaps: Over-the-counter contracts that allow direct trading on realized variance (volatility squared).

The Bottom Line

The Cboe Volatility Index, commonly known as the VIX or “fear index,” represents the market’s expectation of volatility over the next 30 days. Introduced by the Chicago Board Options Exchange (Cboe) in 1993, the VIX has become a widely watched indicator of market sentiment and risk.

It’s derived from the prices of S&P 500 index options and also represents an expected percentage trading range for the upcoming 12-month period. The VIX typically has an inverse relationship with the S&P 500, rising when stocks fall and vice versa, which makes it a valuable tool for assessing market stress and potential turning points.