The CBOE Volatility Index (VIX) is probably the most widely tracked measure of U.S. stock-market volatility. This volatility index, as compiled by the Chicago Board Options Exchange (CBOE), is meant to reflect investors' expectations for short-term (30-day) volatility in the stock market.
VIX accomplishes this by measuring the implied volatilities of a weighted range of S&P 500 Index (SPX) options, using puts and calls at a variety of different strike prices. When implied volatility on SPX options rises, the VIX will also move higher. Falling SPX implied volatility translates into a lower VIX.
Because high volatility is traditionally associated with bearish price action, the VIX is often referred to as the "fear index" or "fear gauge." However, VIX can more accurately be said to measure investors' uncertainty, as opposed to fear.
VIX itself cannot be traded directly, but futures and options are available. Additionally, there are a number of exchange-traded notes (ETNs) through which speculators can place their bets on future volatility.
The CBOE S&P 100 Volatility Index (VXO) is similar to the VIX, but the benchmark index from which it derives its value is the narrower S&P 100 Index (OEX). Until a revamp in 2003, the VIX was based on OEX options, but CBOE ultimately determined the switch to SPX options would provide a broader sampling of volatility expectations. However, traders can still keep an eye on the "old VIX" by tracking the progress of the renamed VXO.
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