Volatility and the VIX explained
In an investing context, volatility is the frequency and magnitude of price movements. While most investors probably associate volatility with painful market declines, in reality, it’s a two-sided coin, as it’s a function of price gains as well. The more dramatic the market’s price swings are, the higher the level of volatility. Price changes occurring within the span of a trading day reflect what’s known as intraday volatility.
The most frequently used volatility benchmark is the Cboe Volatility Index—commonly known as the VIX, and often referred to as the market’s fear index, or fear gauge. It’s a barometer of investors’ expectations as to how much market uncertainty lies ahead over the next 30 days, as measured by fluctuations in prices for options on the S&P 500 Index. (Options are contracts offering the buyer the opportunity to buy or sell stock—depending on whether the contract is a call option or a put option—at a stated price within a specific timeframe.)
When investors expect uncertainty about the market’s direction will decrease, they’re less inclined to pay a premium for the potential protection that a stock option may provide against a future loss from a market decline. On the flip side, when expectations of uncertainty climb, options prices tend to rise, as does the VIX. Typically, a decline in stock prices is accompanied by a rise in the VIX. Fluctuations in the VIX’s level throughout a trading day reflect aggregate changes in options prices. As with other market indexes, the VIX’s daily closing price is calculated after the closing bell.
What’s high for the VIX? What’s low?
From January 1990 through March 2022, the VIX’s average closing price was 19.5. The index does occasionally descend into the single digits, as it did through an unusually quiet stretch for stocks in 2017.
Rising volatility reflects higher levels of uncertainty and fear
Cboe Volatility Index (VIX), January 1990–March 2022
Source: Manulife Investment Management, Macrobond, as of March 4, 2022
During the global financial crisis, the VIX spiked to a record high of 89.5 in intraday trading on October 24, 2008. The record closing high, however, was seen on March 16, 2020, around the moment of the global recognition of the COVID-19 pandemic; on that day, the S&P 500 Index lost 11.98%.
What volatility and the VIX may mean for investors
The first thing to note is that the VIX is an index, so just like any other index, it’s not directly tradeable. There are products such as exchange-traded funds that can be used to trade derivatives of the VIX, such as tradeable options and futures (for more sophisticated investors), but unless you hold one of these products, movements in the VIX wouldn’t directly affect your portfolio.
However, by understanding what the VIX reflects—the relative level of broad-based investor uncertainty and fear—you can temper your own response to how it moves. Seeing a rise in the VIX, you can avoid the temptation to panic sell, which can affect long-run performance of individual portfolios. It can also help you carefully consider how your portfolio is allocated to different asset types and how resilient or vulnerable it may be to market drawdowns. Any period of heightened uncertainty can be an opportune time to meet with a trusted financial professional to review your financial goals and follow a plan that helps you make the most of what may continue to be a challenging situation.
The Cboe Volatility Index (VIX) shows the market’s expectation of 30-day volatility and is constructed using the implied volatilities of a wide range of S&P 500 Index options. The S&P 500 Index tracks the performance of 500 of the largest publicly traded companies in the United States. It is not possible to invest directly in an index.
This material does not constitute tax, legal, or accounting advice and neither John Hancock nor any of its agents, employees, or registered representatives are in the business of offering such advice. Please consult your personal tax professional for information about your individual situation. The views and opinions on this site are subject to change and do not constitute investment advice or a recommendation regarding any specific product or security. John Hancock Investment Management and its representatives and affiliates may receive compensation derived from the sale of and/or from any investment made in its products and services.
Past performance does not guarantee future results.