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What is VIX ‘Fear Index’ and how to trade it

12 minutes
Cristian Cochintu
Cristian Cochintu
11 August 2023
VIX is one of the most common barometers of market sentiment. For traders, the VIX not only represents a useful tool for assessing risk, but also the opportunity to capitalise on volatility

Traders should keep a close eye on the CBOE Volatility Index, also known as the ‘terror index' or VIX index when trading major indices like the S&P 500. The S&P 500 - VIX correlation is a primary example of why the relationship between the U.S. stock market and the VIX index is referred to as a “fear barometer”. 

How to Trade or Invest in VIX Index – Quick Guide

If you’d like to trade or invest in the "Fear Index", follow these three steps, or discover our full guide below:


What is the VIX (Fear Index)? 

The Cboe Volatility Index (VIX) is a real-time index that represents the market's expectations for the relative strength of near-term price changes of the S&P 500 index (SPX). Because it is derived from the prices of SPX index options with near-term expiration dates, it generates a 30-day forward projection of volatility. Volatility, or how fast prices change, is often seen as a way to gauge market sentiment, and in particular the degree of fear among market participants. 

The index is more commonly known by its ticker symbol and is often referred to simply as "the VIX." It was created by the Chicago Board Options Exchange (CBOE) and is maintained by Cboe Global Markets. It is an important index in the world of trading and investment because it provides a quantifiable measure of market risk and investors' sentiments. 

It’s a real-time index that reflects market participants’ expectations of volatility over the next 30 days.  

What is the VIX (Fear Index)?
Source: CAPEX WebTrader

At the most basic level, the VIX index is constructed using weekly and traditional SPX index options and their levels of implied volatility. One can think of implied volatility as expected volatility derived from market participants’ activity in the options market. Understanding why the VIX behaves inversely to the S&P 500 is important because the volatility index acts as a measure of market sentiment, hence the reason it is called a “fear barometer” or “terror index”. 

Why trade the VIX? 

VIX-linked instruments have a strong negative correlation with the stock market, which has made them a popular choice among traders and investors for diversification and hedging, as well as pure speculation. 

By taking a position on the VIX, you could potentially balance out other stock positions in your portfolio and hedge your market exposure. 

Let’s say that you have a long position on the stock of a US company that was a constituent of the S&P 500. Although you believe it has long-term prospects, you want to reduce your exposure to some short-term volatility. You decide to open a position to buy the VIX with the expectation that volatility is going to increase. By doing so, you might balance out these positions. 

If you were wrong, and volatility didn’t increase, your losses to your VIX position could be mitigated by gains to your existing trade. 

How the VIX index works

The VIX works by tracking the underlying price of S&P 500 options – not the stock market itself. Here you’ll learn what S&P 500 options are, how the VIX is calculated, and what its value means.  

What is the relationship between VIX Index and S&P 500?

The S&P 500 VIX has a propensity to rise in bearish stock market environments and fall or remain steady during bullish environments. This happens because of the long-term bullish bias of the stock market and the fact that the VIX index is calculated using implied volatility. 

Implied volatility goes up when there is strong demand for options, and this typically happens during declines in the price of the S&P 500 as market participants (who are collectively bullish) are quick to buy protection (put options) for their portfolios. 

When the S&P 500 rallies we see demand for protection dissipate and as a result a decline in the VIX. This process in recent years has become exasperated, in all likelihood, because the VIX has gone from just a market gauge of volatility to a tradable asset class through product offerings on various futures, equities, and options exchanges. 

What is the relationship between VIX Index and S&P 500?
Source: CAPEX WebTrader

Dating back to the beginning of the VIX in 1990, the correlation between daily changes in the S&P 500 and VIX is -77%. Over the past 10 years, the inverse correlation has become even stronger at -81%, while prior to October 2010 it was -74%. 

Understanding VIX values 

There is a strong negative correlation between the VIX and stock market returns. If the VIX moves up, it is likely that the S&P 500 is falling in price due to increasing investor fears. If the volatility index declines, then the S&P 500 is likely to be experiencing stability and investors are relatively stress-free. Trading volatility is not the equivalent of a market downturn, as it is possible for the market to decline but volatility remains low. 

Volatility is a measure of the movement of an asset’s price, rather than the price of the asset itself. This means that when you trade volatility, you aren’t focused on the direction of change, but on how much the market has moved and how frequently movement occurs. This is why VIX values are quoted as percentage points. 

As a rule of thumb, VIX values greater than 30 are generally linked to large volatility resulting from increased uncertainty, risk, and investors’ fear. VIX values below 20 generally correspond to stable, stress-free periods in the markets. 

The VIX is thought to predict tops and bottoms in the SPX: as it reaches extreme highs, this is seen as a sign of impending bullish pressure on the S&P 500, and as it reaches extreme lows it is seen as bearish for the S&P 500.  

There is even a mantra that states:  When the VIX is high, it’s time to buy. When the VIX is low, look out below. 


Using a VIX stock chart to predict market volatility  

The S&P500 VIX can be used to identify market turns, more specifically bottoms. Because the stock market tends to rise in a gradual fashion the VIX too will decline in a gradual to sideways fashion. This can lead to very low levels which warn of complacency as investors feel no need for protection, but these periods can last long enough that using the VIX as a sell signal can be rendered largely ineffective. 

However, because the S&P 500 is long-biased by nature when there are declines investors buy protection (put options) quickly, driving up the VIX. Often there is an overreaction by market participants when the market declines, hence the reason why the VIX is called a “fear index”. 

The spike-like behavior that the VIX exhibits during times of market stress can be a timely signal for determining when selling has become overdone and the market is due to bounce or even bottom for a longer-term move higher. This strategy is typically best employed when the VIX ‘signal’ arrives within the context of a general bullish trend in the S&P 500. 

VIX live chart price spikes can be used to indicate stock market bottoms. 

  • When the VIX live chart price is at very low levels, there is a nuance to this that can help identify when the stock market may be nearing a turning point to the downside, but they don’t happen frequently.
  • When the VIX and S&P 500 both rise together over a period of time it can indicate growing instability in the trend which sets the market up for a sell-off. 

Ways to Trade and Invest in the VIX Index 

Like all indexes, the VIX index is not something you can buy directly. Moreover, unlike a stock index such as the S&P 500, you can't even buy a basket of underlying components to mimic the VIX. Instead, VIX trading is possible only through futures contracts and through exchange-traded funds (ETFs) that own those futures contracts. 

With you can get exposure on VIX both ways: 
trading VIX through CFDs or buying shares in the only VIX ETF traded on the US exchanges.


Trading VIX Futures through CFDs

CFD trading is defined as ‘the buying and selling of CFDs’, with ‘CFD’ meaning ‘contract for difference’. CFDs are derivative products because they enable you to speculate on financial markets such as shares, forex, indices, and commodities without having to take ownership of the underlying assets.  

Instead, when you trade a CFD, you are agreeing to exchange the difference in the price of an asset from the point at which the contract is opened to when it is closed. One of the main benefits of CFD trading is that you can speculate on price movements in either direction, with the profit or loss you make depending on the extent to which your forecast is correct. 

When you open a position on the VIX, there are two basic positions that you can take: long or short. It is important to remember that volatility traders are not interested in whether the price of the S&P 500 is going to rise or fall, as they can capitalize on both – they are instead looking at whether the market is volatile. 

Going long on the VIX 

The position you decide to take will depend on your expectation of volatility levels. Traders who go long on the VIX are those that believe that volatility is going to increase and so the VIX will rise. Going long on the VIX is a popular position in times of financial instability when there is a lot of stress and uncertainty in the market. 
For example, if you thought that the S&P 500 was going to experience a significant and rapid decline following a political announcement, you might take a long view of volatility. You could do this by opening a position to buy the VIX. 
If there was volatility, your prediction would have been correct, and you could make a profit. However, if you had taken a long position and there was no volatility in the market, your position would have suffered a loss. 

Going short on the VIX 

When you take a short position on the VIX, you are essentially expecting that the S&P 500 is going to rise in value. Short-selling volatility is particularly popular when interest rates are low, there is reasonable economic growth, and low volatility across financial markets. 
Let’s say that the combination of low volatility and high economic growth had led to steady growth in the S&P 500 constituent’s share prices. You might decide to short volatility with the expectation that the stock market will keep rising and volatility will remain low. 
If the S&P 500 does rise, then the VIX is likely to move to a lower level, and you could make a profit. However, shorting volatility is inherently risky, as there is the potential for unlimited loss if volatility spikes. 


Investing in VIX-linked ETFs

There is also an ETF for investors looking to play the other side of the volatility coin. The ProShares Short VIX Short-Term Futures ETF (SVXY) is an inverse ETF that seeks daily investment results equal to one-half the inverse of the daily performance of the S&P 500 VIX Short-Term Futures Index.

The SVXY has a slightly higher expense ratio of 0.95% and more than $293 million in assets under management (AUM) as of July 21, 2023.

A critical key for investing in SVXY is understanding that the fund is only intended for short-term trading and is not a buy-and-hold strategy. SVXY seeks its inverse return from its underlying benchmark for a single day, as measured from one net asset value (NAV) calculation to the next. Investors in SVXY should monitor and manage their investments daily. Inverse ETFs held for more than a day can lead to significant losses.

Investing in VIX-linked ETFs

Below are the performance returns of the SVXY based on available time periods as of June 30, 2023.

  • One month: 17.33%
  • Three months: 32.83%
  • One year: 75.65%
  • Three years: 39.05%8  

*Because inverse ETFs can rack up significant losses quickly, they are designed for knowledgeable investors who should carefully consider their risk tolerance before investing.

Beware the Lag

Investors considering an inverse VIX ETF should realize that it is not a great proxy for the performance of the spot VIX. Such a fund can be expected to perform very differently from the VIX. It may rise or fall in tandem with the VIX, but the rate at which it moves and the lag time can make pinpointing entry and exit points challenging even for seasoned traders.

Market volatility investments are best suited for investors with a short-time horizon who can closely watch their positions and move quickly if the market turns against them.

If investors want to place bets on equity market volatility or use them as hedges, the VIX-related ETF products are acceptable but highly-flawed instruments; however, they certainly have a strong convenience aspect to them, as they trade like any other stock.

How to Get Started with

Creating a live account with is a straightforward process. You could be ready to open your first position in minutes with these quick steps:

1. Fill in our simple online form

We’ll ask a few questions about your trading experience.  

2. Choose your account type 

Decide whether to open a CFD trading or an Invest account.

3. Fund your account to open a position

Withdraw money easily, whenever you like.

VIX ‘Fear Index’ summarized 

To summarize, understanding stock market volatility and the’ Fear Index’ (VIX) is important for trading stocks. There are benefits to understanding the nature of volatility from both an analytical and risk management standpoint. Like all things, getting a feel for the relationship between the VIX fear index and the S&P 500 will take a little experience to get a handle on, but well worth the time. 

  • The VIX tells us the market’s expectation of volatility, rather than current or historic market levels. However, it is considered a leading indicator for the wider stock market.  
  • When the VIX goes up in value, it means the price of the S&P 500 is likely falling and the value of SPX put options is increasing. 
  • When the VIX falls in value, it usually means that the price of the S&P 500 is rising in price or experiencing relative stability – leading SPX options investors to pursue bullish or neutral strategies. 
  • You can use the VIX as part of a trading strategy as it can give indications of whether the S&P 500, and the stock market in general, is going to reverse from its current trend. 
  • The key thing to remember is just that the VIX index and the S&P 500 have an inverse relationship, so when the VIX is rising or falling, the S&P will likely be doing the opposite. This makes the VIX fear index a popular hedging tool. 

Free Resources  

Before you start trading or investing in the VIX index, you should consider using the educational resources we offer like CAPEX Academy or a demo trading account. CAPEX Academy has lots of free trading and investing courses for you to choose from, and they all tackle a different financial concept or process – like the basics of analyses – to help you to become a better trader or make more-informed investment decisions.  

Our demo account is a suitable place for you to get an intimate understanding of how trading and investing work – as well as what it’s like to trade with leverage – before risking real capital. For this reason, a demo account with us is a great tool for investors who are looking to make a transition to leveraged securities. 

FAQs about VIX Index






Cristian Cochintu
Cristian Cochintu

Cristian Cochintu writes about trading and investing for Cristian has more than 15 years of brokerage, freelance, and in-house experience writing for financial institutions and coaching financial writers.