The $Cboe Volatility Index(VIX)$ , officially known as the Chicago Board Options Exchange Volatility Index, is calculated based on the prices of near-month and next-month options with expiration dates ranging from 23 to 37 days. It measures the annualized volatility of the $S&P 500(.SPX)$ over the next 30 days.
In simple terms, the VIX index gauges the implied volatility of the S&P 500 Index. A higher VIX value indicates that investors anticipate greater market volatility. Given the significance of the S&P 500 Index, the S&P 500 VIX Index can be seen as a harbinger of potential market risks, hence also known as the "Fear Index."
The "16 Rule" of Volatility
While investors can trade futures and options on VIX, few truly understand this volatility measure, its implications, how it's calculated, and how to accurately estimate its value.
Introduced by Cboe in 1993 as a weighted measure of the implied volatility (IV) of S&P 100 Index (OEX) options, VIX switched to using more actively traded S&P 500 Index options in 2003. Since then, VIX has evolved into a preeminent indicator of investor fear and overall market volatility.
According to the "16 Rule," if VIX trades at 16, the estimated daily swing of SPX is 1% (as 16/16 = 1). If VIX is 24, daily volatility could be around 1.5%, and at 32, per the 16 Rule, SPX might experience 2% daily swings.
Investment Approaches with VIX
Theoretically, VIX can surge very high, exceeding 80 during the extreme panic of the 2020 pandemic, within a short period. VIX is highly volatile, prone to sharp spikes and crashes, or lingering lows. Typically, significant short-term spikes in VIX precede attractive trading opportunities.
VIX Investment Tools:
（1）ETFs:
-Short-Term VIX Futures $iPath Series B S&P 500 VIX Short-Term Futures ETN(VXX)$
- $ProShares Ultra VIX Short-Term Futures ETF(UVXY)$ , which provides 1.5x exposure
- $2X Long VIX Futures ETF(UVIX)$ , offering 2x exposure
（2）Futures:
- Volatility Index -$Volatility Index - main 2408(VIXmain)$
- Mini Volatility Index - $Mini Volatility Index - main 2408(VXMmain)$
ETFs, composed of futures, tend to decline in the long run due to rollover losses. VIX futures, however, don't suffer from this. Therefore, for a long-term bullish view on VIX, taking long positions in VIX futures is preferable.
For retail investors seeking speculative trades, ETFs, particularly UVXY, are a good option due to its liquid options market, enabling strategic trades.
Regarding short-term VIX trends, if the market doesn't plunge further and remains sideways, rises slightly, or dips marginally, the VIX Index will gradually decline. If investors expect reduced market volatility, strategies like selling call options or executing bear spreads on UVXY could be adopted.
Conversely, if they foresee heightened volatility and further market declines, buying call options or executing bull spreads on UVXY could be profitable approaches.
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