volatility index

One of the most recognized ways to measure expected volatility in the stock market is through the volatility index, often referred to as the VIX.

In this article, Wealth Professional Canada will talk about what the volatility index is and how it is calculated. We'll also discuss what its readings mean for financial advisors and your clients.

What is the volatility index?

The volatility index or VIX is a real-time indicator that measures the market's expectations for volatility in the S&P 500 Index over the next 30 days. The VIX is often called the "fear index" because it tends to spike during periods of market stress or uncertainty. It is widely followed as a daily signal of how much risk and nervousness investors are feeling.

The VIX was created by CBOE Global Markets, the owner of the Chicago Board Options Exchange (CBOE), in 1993. It uses the prices of S&P 500 options to estimate how much the market thinks the index will fluctuate over the next month. The higher the VIX, the more the market expects prices to swing, either up or down.

Canada has its own version of the volatility index. The S&P/TSX 60 VIX Index measures the 30-day implied volatility of the Canadian stock market. This index is represented by the S&P/TSX 60 ETF (XIU) and uses options on the ETF to calculate expected volatility.

Want to know more about VIX? Watch this video:

As mentioned above, the S&P/TSX 60 VIX Index uses options, a type of derivative, on the S&P/TSX 60 ETF (XIU) to measure expected volatility. The prices of these derivatives reflect market sentiment and are the basis for calculating the VIX.

Why the VIX matters

The VIX is more than just a number on a screen. It provides a window into market sentiment and risk. When the VIX is low, it usually means investors are feeling confident and markets are stable. When the VIX is high, it signals fear, uncertainty, or the expectation of big price swings.

You can use the VIX to help your clients understand what is happening in the market and to identify opportunities or risks. For example, if the VIX is rising, it might be a sign that investors are worried about upcoming events or economic news. If the VIX is falling, it might mean that confidence is returning.

However, the VIX is not a perfect predictor of future market moves. What it reflects are current expectations, which can change quickly. The VIX should be used alongside other strategies and measures. You can also use this when conducting fundamental analysis.

What is volatility?

Volatility is a measure of how quickly and by how much the price of a financial asset changes. It's not just about wild price swings; it is also a way to assess market sentiment and risk. When prices move up and down rapidly, volatility is high. When prices are stable, volatility is low.

Volatility can be measured in several ways:

• Standard deviation: This is a statistical measure showing how much a security's price has moved over a certain period. The more the price has changed, the higher the standard deviation and the higher the volatility.
• Beta: Beta measures how much a security's price moves in relation to the market. A beta of 1 means the security moves in line with the market. A beta above 1 means it is more volatile than the market, and below 1 means it is less volatile.
• Implied volatility: This is an estimate of future volatility based on the prices of options. When option prices are high, it usually means the market expects more volatility ahead. Implied volatility is the foundation of the VIX.

In summary, volatility can work both ways—prices can fluctuate higher or lower.

Is 20% volatility high?

A common question that you might get is whether a certain level of volatility is high or low. The answer depends on context, but there are some general guidelines based on historical data.

A VIX reading below 20 is usually seen as a sign of a medium-risk environment. This suggests that investors expect the market to be relatively stable in the near future. When the VIX is above 20, it indicates higher expected volatility and more uncertainty.

To put this in perspective, here are some examples of VIX readings during major market events:

• During the height of the global financial crisis in 2008, the VIX skyrocketed above 80. This was a period of extreme market stress and uncertainty.
• As the COVID-19 pandemic led to global lockdowns in 2020, the VIX climbed to 82. Markets around the world experienced massive swings. It dropped to under 20 in 2021 when people started to adapt to the new normal.
• In April 2025, there was another spike in the VIX after the new tariff policy from the United States government. The VIX reached 60.13, suggesting a sudden increase in market anxiety.
• On the other hand, the VIX also spent long periods below 13.5, such as from mid-September 2006 to February 2007. Markets were performing well, and investors were confident.

So, is 20 percent volatility high? In general, a VIX reading of 20 or under can indicate that there is some volatility, but not a lot. But a VIX reading of 20 or above is considered high, especially compared to periods of calm.

However, as observed from global events, it is not unusual for the VIX to move above 20 during times of uncertainty or market stress. As a financial advisor, it is vital for you to look at the bigger picture and consider what is driving volatility. Learn more when you watch this clip:

A sudden spike in the VIX can be a sign of market fear, but it can also create opportunities for those who are prepared.

How the VIX is calculated

The VIX is calculated by analyzing the prices of a wide range of S&P 500 options, both puts and calls, that expire in about 30 days. The formula looks at how much investors are willing to pay for these options. It also reflects how much they expect the index to move in the near future.

Here are the steps in calculating the volatility index:

1. Select a range of call and put options on the S&P 500 Index with two consecutive expiration dates around the 30-day mark.
2. Calculate each option's contribution to the total variance for its expiration.
3. Add up the contributions to get the total variance for each expiration.
4. Interpolate between the two expirations to get the 30-day variance.
5. Take the square root of the variance to get the standard deviation.
6. Multiply by 100 to get the VIX value.

Watch this video to better understand how the VIX is calculated:

When the VIX rises, it can sometimes point to new opportunities that might not be obvious during calmer periods. In these moments, having a diverse portfolio becomes even more valuable, since different assets can react in their own ways to sudden market changes. Diversity is not just about protection—it can also help investors take advantage of what volatility brings.

How financial advisors can use VIX readings

Financial advisors can use VIX readings to help their clients understand market conditions and manage expectations. Let's look at these examples:

• A low VIX (below 20) can signal market stability and optimism. This might be a good time to review your clients' portfolios and check if they are positioned for steady growth.
• A high VIX (above 20) can signal increased risk and uncertainty. This might be a time to discuss risk management strategies with your clients, such as portfolio diversification.
• Some contrarian investors might see a low VIX as a warning sign of complacency, while a high VIX can be seen as a buying opportunity. However, historical data shows that markets have often performed better after periods of low volatility.

Volatility index as a guide

Learning about the volatility index is not only beneficial but necessary if you want to help investors navigate market ups and downs. Whether the VIX is high or low, you must be able to provide guidance and help your clients stay focused on their financial objectives.

Still, remember that the VIX is just one of many financial measures available to wealth professionals. It should be used alongside other forms of analysis and always in the context of your clients' investment goals and risk tolerance.

When you keep an eye on the VIX, you can add another layer of insight to your financial planning conversations with your clients. You'll also be able to support them better through both calm and turbulent markets.

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