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What is the VIX?
By Market Ontology Research
The VIX is the CBOE Volatility Index - a measure of the market's expectation of 30-day forward volatility on the S&P 500, derived from SPX option prices. It is often called the 'fear gauge,' but more accurately it measures the demand for protection. Sub-15 is complacent; 15-20 is normal; 20-30 is elevated; 30+ is stress. The VIX level tells you less than the VIX term structure - when front-month VIX trades above back-month, the market is pricing real near-term stress.
- <15
- Complacent regime. Risk-on.
- 15-20
- Normal range.
- 20-30
- Elevated. Watch for catalysts.
- Term structure
- Inversion (front > back) = real stress.
How the VIX is built
The VIX is computed from a strip of SPX option prices across strikes, expressed as an annualized standard deviation of expected 30-day returns. Higher option prices = higher VIX.
Level guide
- <15 - complacent
- 15-20 - normal
- 20-30 - elevated, hedging demand
- 30-40 - stress
- 40+ - crisis (2008, 2020, 2022 March)
Term structure matters more than level
Compare front-month VIX to 3-month VIX (VIX3M):
- Contango (front < back) - normal, mean-reverting environment
- Inversion (front > back) - real near-term stress, do not sell vol
Common mistakes
- Treating VIX level as a buy/sell signal in isolation
- Ignoring term structure
- Forgetting that VIX is implied, not realized - IV/RV gap matters