What Is the VIX Index? A Beginner’s Guide to Market Volatility

Is the Current Volatility Normal — or Is the Market About to Crash?

Every trader — from beginners to systematic pros — faces this doubt sooner or later. Markets get choppy. Strategies underperform. Headlines scream panic. And the VIX index starts to spike.

But here’s the thing: volatility isn’t a crisis — it’s a signal.

In this article, we’ll break down the VIX index:

• What it is

• How it’s calculated

• Why it matters

• And how to exploit it to build resilient strategies for any market environment

Whether you’re trading discretionary setups or running systematic portfolios, understanding the VIX is key to staying calm, staying positioned, and staying in the game.

🧾 What Is the VIX Index?

The VIX, also known as the Volatility Index or “Fear Gauge,” is a number that reflects how volatile traders expect the S&P 500 to be in the next 30 days.

The VIX is built from options prices. When options traders expect big price swings, the VIX goes up. When they expect calm markets, the VIX goes down.

“It’s not based on actual price moves — it's based on expected volatility. That makes it forward-looking.”

🧠 Want a deeper technical explanation? Check out this Investopedia guide on the VIX

📐 How Is the VIX Calculated?

The VIX is calculated by averaging the prices of a wide range of S&P 500 options (both calls and puts). These are short-term options that expire in the next 23 to 37 days.

The formula is complex, but the idea is simple:

• More expensive options = more fear = higher VIX

• Cheaper options = calmer traders = lower VIX

🌍 Why the VIX Matters Globally

You might think: “Okay, but it’s just the S&P 500.”

Here’s why it matters:

• The S&P 500 represents 80% of the U.S. stock market.

• The U.S. market is nearly 50% of global equity value.

• That means the VIX reflects almost 40% of the global market.

📈 So when the VIX spikes, it usually means global markets feel the shake.

📊 What Is a High VIX Index Value?

The VIX is considered:

• High when it’s above 31

• Low when it’s below 24

  
  

Fig: VIX index thresholds: High (>31) and Low (<24) zones for volatility cycles.

When VIX crosses 31, it usually stays elevated for a while. That means volatility tends to come in waves, not just a single event.

📅 How Often Does the VIX Spike?

Since 1990, the VIX has spiked above 31 twenty times.

• VIX has crossed 31 level on monthly bars nearly every year since 1997

• Volatility is cyclical, not unusual — don’t overreact

  
  

Fig: VIX spikes are frequent — happening nearly every year since 1990.

It’s not rare. In fact, except for 1990–1997, it has spiked nearly every year.

Fig: A bar chart showing number of VIX spikes per month of year.

⌛ How Long Does High VIX Volatility Last?

Let’s say the VIX spikes this month. How long until things calm down?

Fig: Volatility rarely disappears quickly; average duration is 2–7 months.

Here’s what history shows:

• 8 times: VIX took 2–4 months to return to low

• 6 times: Took 5–7 months

• 2 times: Took up to 20 months

🎯 Bottom line: Once VIX spikes, it doesn’t fall fast. Be ready to ride it out.

📈 What Happens to the S&P 500 During High VIX?

You might expect crashes… but that’s not the full picture.

Here’s what happened to the S&P 500 between each VIX spike (above 31) and the return to calm (below 24):

Fig: The Market tends to rally between VIX spike and a volatility drop.

• 17 times: Positive returns

• 3 times: Negative returns

The market often rallies during volatility.

Fig: Drawdowns happen during VIX spikes, but long-term returns stay positive

However, drawdowns are common:

Fig: Drawdown chart of S&P during VIX spikes

12 times: Drops between 5–15%

• 4 times: 15–25%

• 2 extreme cases: 35–45%

🔄 Volatility Is a Part of the Market

“Volatility is not an outlier event or a crisis event. Volatility is built into the market.” – Ali Casey

Volatility is not a crisis — it’s a season.

The VIX spikes → stays high → drops → stays low → repeats. Again and again.

 That’s why panicking makes no sense. The VIX is a reminder that risk comes in waves. It’s not a glitch. It’s the market.

 🧭 What Should You Do When the VIX Spikes?

👇 Here’s a quick visual summary of what each type of trader or investor should consider when volatility rises:

Fig: A visual representation of different solutions when VIX spikes.

Let’s break it down based on who you are:

🧓 For Long-Term Investors

• If you can handle volatility, stay in.

• If not, exit and re-enter when VIX < 24 on the monthly chart.

• Most of the time, you’ll see positive returns on the SP500 after the volatility high wave ends.

🧠 For Discretionary Traders

• Stop trading.

• Volatility kills inexperienced traders, especially if using leverage.

• If you have to trade, then reduce your capital exposure by 50%. Example: If you have $1,000, treat it as $500.

🤖 For Systematic Investors

• Use a rules-based portfolios of global assets.

• Allocate to assets with positive momentum.

• If no asset is showing positive momentum, then move to bonds or cash.

• Example: Quad Edge Momentum or TAA portfolios [https://taa.statoasis.com/taa10-quadedge-momentum]

💼 For Systematic Traders

• Trade a portfolio of low-correlated strategies

• Use volatility filters

• Shrink position sizes during high VIX to reduce variance.

• Consider pausing weaker strategies

🌾 Diversify Beyond the Stock Market

If you’re managing large capital, think beyond equities:

• 🏡 Real estate (through ETFs, eg. VNQ)

• 🚜 Farmland (through ETFs, eg. TAGS)

• 💰 Investing in Startups (slow ETF solutions)

• ₿ Crypto portfolio

These help reduce correlation when the VIX is flying high.

📈 Can You Trade the VIX?

Yes, you can. But be careful — it’s not a beginner’s instrument.

You can trade:

• VIX futures

• VIX ETFs/ETNs like VXX, UVXY

• Options on the VIX itself

A simple VIX trading strategy:

Wait for price to spike up, so for Entry we can use:

• higher closes

• Higher oscillator value

• Highest High (in a period)

For Exit we can use:

• Lower closes

• Lower oscillator value

• Lowest Low (in a period)

• But always make sure to have protection in case things go against the trade. I usually prefer a fixed number of bars exit.

Here is a strategy that trade the VIX index successfully:

• Entry: higher close

• Exit 1: low oscillator value

• Exit 2: fixed number of bars

Use Higher Close in a row with an oscillator exit and a fixed number of bars protection stop.

Fig: An equity chart showing VIX strategy growth over the past 17 years.

Want to get the VIX strategy code? 📩 Or just reply to this email — I’ll send it right to your inbox.

 📌 Final Thoughts

Volatility is part of the game. The VIX isn’t a villain — it’s a signal. Learn to listen.

“When others are fearful, be greedy.” – Warren Buffett

Have a plan. Stick to it. Don’t let financial news headlines shake you.

 📚 Related Reads from StatOasis

If you’re serious about building strategies that can survive volatile markets, we highly recommend this post:
👉 Why Most Traders Fail: The Missing Piece Called Robustness Testing

It breaks down how in-sample/out-of-sample testing helps you build strategies that hold up under pressure — exactly what’s needed when the VIX spikes and emotions run high.

 🎥 Want a Visual Walkthrough?

If you prefer learning through video, I break down everything in this article — plus show charts and examples — in this quick YouTube video: Watch the VIX Breakdown on YouTube It's a great companion to this guide if you're more of a visual learner.

🙋 FAQs About the VIX Index

What is the VIX index in simple terms?

It’s a number that shows how much price movement traders expect in the S&P 500 in the next month.

How is the VIX calculated?

By using the prices of a wide range of S&P 500 options to estimate expected volatility.

Why does the VIX spike?

When traders expect big moves or panic sets in, options get expensive, and the VIX rises.

Should I sell when the VIX is high?

Not always. Most of the time, markets recover. If you can’t handle it emotionally, reduce exposure and re-enter later.

Is the VIX index tradable?

Yes, using VIX futures, ETFs, or options — but it's advanced and risky.

What happens after a VIX spike?

Historically, the S&P 500 posts positive returns most of the time as volatility fades