The VIX Index and Volatility-Based Global Indexes and Trading Instruments

The Cboe Volatility Index® (VIX® Index) measures the market’s expectation of future volatility conveyed by S&P 500 Index option prices. The VIX is recognized as a premier gauge of expected US equity market volatility. The 2000–09 decade experienced two deep bear markets for equities that saw numerous short-term periods of high levels of investor uncertainty. Most investors recall how during the financial crisis of 2008–2009, the correlations between equities rose globally and traditional diversification goals became difficult to achieve. Exchange-listed VIX futures were launched in 2004, and VIX options were launched in 2006. During the 2008–09 financial crisis, VIX futures and VIX options experienced tremendous growth, as interest in and use of such index-based products as exchange-traded notes and exchange-traded funds grew. These products have become widely used in investors’ strategies ranging from trading tactical views on volatility to incorporating volatility trades and hedges in risk management and multiasset strategies.

This study addresses several questions investors have asked related to the VIX Index, volatility-based trading products, and the use of VIX futures in portfolio construction. These questions include the following:

1. What does the VIX Index measure, and what does a VIX level signify?
2. What are some indexes that measure expected volatility of European or Asian stock indexes?
3. How do features such as convexity and negative correlation make the VIX an intriguing investment gauge?
4. Is the VIX Index tradable, and if not, why?
5. What tradable volatility-based futures and options products are available?
6. How do contango and backwardation affect the returns of VIX futures-based strategies?
7. What volatility benchmark indexes are available, and what is their impact when added to S&P 500 portfolios?