What VIX Tells You (and What It Doesn't)

VIX is not a measure of what the market is doing. It's a measure of what the market expects to do over the next 30 days. That distinction matters more than most people realize.

Options series, part 3 of 3: Options trading → Options Greeks → VIX and volatility. VIX is calculated from options prices. Parts 1 and 2 cover the foundation.

What VIX Actually Measures

VIX is derived from the prices of S&P 500 options across a range of strike prices and two nearby expiration dates. When options are expensive (high implied volatility), VIX is high. When options are cheap, VIX is low.

Specifically, VIX represents the annualized expected move of the S&P 500 over the next 30 calendar days, stated as a percentage. A VIX of 20 means options are pricing in roughly a 20% annualized move, or about a 5.8% move over the next 30 days in either direction.

The conversion: monthly expected move = VIX / sqrt(12). At VIX 20: 20 / 3.46 = 5.8% expected monthly range.

VIX Regimes

• Below 15: Low volatility. Markets are calm, complacent. Often precedes corrections because under-hedging leaves portfolios exposed to sharp moves.
• 15 to 25: Normal range. Some uncertainty, options priced fairly. Most of market history lives here.
• 25 to 35: Elevated. Meaningful concern about near-term direction. Option premiums become significantly more expensive.
• Above 35: Fear mode. March 2020 (COVID crash, VIX hit 85) and the 2008 financial crisis lived here. Markets in free-fall, implied volatility priced at extremes.

Why VIX Spikes in Crashes

When markets fall, investors rush to buy put options as portfolio insurance. High demand for puts drives up put premiums. Since the VIX formula incorporates put and call prices across strikes, surging put demand drives VIX higher. This is why VIX and the S&P 500 are negatively correlated: when stocks fall hard, VIX rises hard.

VIX is also not symmetric. It rises much faster than it falls. A 30% market drop can send VIX from 15 to 80 in days. A recovery from 80 to 20 might take months.

What VIX Doesn't Tell You

VIX says nothing about direction. A VIX of 40 means the market expects large moves: it doesn't specify up or down. Investors who interpret high VIX as a sell signal are using it wrong. High VIX is a volatility signal, not a directional one.

It also doesn't tell you when a spike ends. VIX can stay elevated for extended periods. "It's high so it must come down" is not a trade. Mean reversion in volatility is real but not reliably timed.

Earlier in this series

• Options trading: the real mechanics (part 1 of 3)
• Options Greeks without the mysticism (part 2 of 3)

VIX is the price of insurance. When everyone wants insurance, insurance gets expensive. When nobody thinks they need it, it's cheap, which is exactly when you should probably buy some.