VIX Formula
How can investors better manage market volatility?
The VIX is essential for traders because it:
Provides trading opportunities through VIX futures, options, and ETFs, enabling strategies that profit from rising or falling volatility.
Influences options pricing-higher VIX usually means more expensive options, guiding options strategies.
Acts as a “fear gauge,” reflecting market sentiment and expectations for volatility over the next 30 days.
Offers a tool for portfolio hedging, as VIX-linked products often move opposite to the S&P 500, helping offset stock losses during market downturns.
Helps with market timing, as extreme VIX levels can signal potential market tops or bottoms.
Understanding the VIX allows traders to better manage risk, diversify portfolios, and identify trading opportunities in volatile markets.
The significance of understanding the VIX in investing becomes clear when we examine the daily VIX chart shown above.
Markets reacted sharply and negatively to the tariff announcement on April 2, 2025. President Trump’s sweeping new tariffs-including a 10% baseline on all imports and much higher rates for certain countries-sparked immediate volatility. The VIX (CBOE Volatility Index) spiked sharply, peaking at 60.13 on April 7 and 55.66 on April 8, reflecting intense market fear and uncertainty,
Markets reacted very positively to the announcement of major tariff reductions between the United States and China on May 12, 2025. The VIX experienced one of its steepest drops in history, falling from above 40 to below 20 in less than a month.
By May 12, 2025, the VIX had dropped to around 19-the lowest level since March-signaling a dramatic decline in market anxiety and a return of investor confidence.
The chart below demonstrates the impact of political events on market volatility. The VIX often peaks just before or on Election Day, reflecting maximum uncertainty. Once the outcome is known, volatility tends to decline sharply as uncertainty is resolved
VIX Formula (Simplified)
The core formula for each term’s variance is:
K0: First strike below the forward index level (F)
The sum runs over all selected OTM calls and puts.
After interpolating to 30 days and taking the square root, you multiply by 100 to get the VIX index value.
VIX Formula Explained in Detail
Step-by-Step Breakdown of the VIX Calculation
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