What is the CBOE Volatility Index (VIX) and Why It’s Important to Option Traders

Cole Turner

The CBOE Volatility Index, or VIX, is an index that shows the stock market’s expected 30-day volatility.

It is important to understand that the VIX allows investors to watch the volatility of the stock market easily. Knowing when prices are expected to increase or decrease will help an investor make better investment decisions overall.

This article will explain what the VIX is and indicate that there is a possibility of trading VIX options. This opens a new window of opportunity to make a profit.

The VIX is based on the prices of call and put options on the S&P 500 Index (SPX). It is used globally by a number of market participants as the premier measure of stock market volatility.

The VIX is known as an investor’s “fear gauge.” It moves up when market prices are falling and there is uncertainty in the market. The VIX moves down when market prices are steadily rising and there is less fear in the market.

When the VIX value is greater than 30, then that generally means that there is a large amount of volatility in the market due to investor fear and uncertainty. When the VIX is less than 20, then that generally means volatility and uncertainty is low.

The VIX gets its value by estimating how volatile the prices of options on the S&P 500 will be between the current date and the expiration date of the option.

Since the VIX has a value in itself, VIX options are available to be traded and are offered by the CBOE. If an investor expects the VIX to spike up or down, then trading VIX options gives the investor an opportunity to capitalize from that.

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There is a lot of potential to profit from the VIX. Whether that profit comes from reading the volatility of the market, or trading VIX options, having an understanding of the VIX is a necessity in order to make those profits.

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