Investors use the VIX index to determine the market’s volatility or anxiety level, according to The Street. Known as the Chicago Board Options Exchange Volatility Index, traders follow a mathematical calculation that measures how much markets think the S&P 100 may perform over a 12-month period.
Stock prices do not determine the VIX calculation as they do with the Dow Jones Industrial Average or the S&P 500, explains Six Figure Investing. Instead, CBOE members created the index to make money on market sentiment and the difference between the call and put prices of options. Using the S&P 500 index, investors follow option prices known as SPX options.
Some investors refer to the VIX as the fear index, states Seeking Alpha. However, it is normally a good index that determines the expectation of market volatility, but not the actual volatility. The VIX establishes what investors are willing to pay at a premium for the right to buy or sell options. As with any other investment, when the premium for options falls, the VIX falls, and when the premium to pay for options rises, the VIX rises. The VIX provides a weighted average of the options prices and their premiums from the S&P 500, known as SPX options.