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Military Finances 101: Understanding the VIX Thumbnail

Military Finances 101: Understanding the VIX

Investment Managing Your Finances

One of the things I like about my post-military career is that I still get use acronyms. One of those acronyms, which I admittedly don't use very often, is the VIX. VIX stands for Volatility Index. As a firm, we don't recommend that military investors (or any investors for that matter) routinely check on the market. But it is pretty hard to go through a day in today's world where you won't at least hear a market update.

Since you're likely to hear the VIX quoted (sometimes breathlessly), you should understand how it is calculated and what it might mean.

What is the VIX?

The VIX, or Volatility Index, was introduced by the Chicago Board Options Exchange (CBOE) in 1993.1 It measures the market's expectation of 30-day forward-looking volatility based on the prices of the Standard and Poor’s 500 (S&P 500) index options. In other words, the VIX quantifies the level of fear or complacency among investors, offering a real-time snapshot of market sentiment.

How is the VIX Calculated?

The calculation of the VIX is complicated and involves several factors, including options, weighting, formulas, and adjustments.2

  • Options Selection: The VIX uses a wide range of S&P 500 index options, focusing on those with a maturity of around 30 days.
  • Weighting: The selected options are weighted based on their prices, with near-the-money options (those whose strike price is close to but not at the current underlying price) significantly impacting the index.
  • Formula Application: The weighted options prices are then fed into a formula that estimates the expected volatility. This involves summing the weighted prices and applying a series of mathematical adjustments to account for the time value of money and other factors.

The result is a single number representing the expected annualized change in the S&P 500 index over the next 30 days, expressed as a percentage. For example, a VIX level of 20 suggests an expected annualized volatility of 20%.

Interpreting the VIX

Understanding the VIX requires interpreting its output in terms of market conditions:3

  • Low VIX (Below 20): A low VIX may indicate a stable market with low expected volatility. Investors are generally optimistic, and the market is calm.
  • Moderate VIX (20-30): This range may suggest moderate uncertainty. While not overly fearful, investors are cautious and aware of potential risks.
  • High VIX (Above 30): A high VIX may signal significant fear and uncertainty in the market. It often coincides with market turmoil, sharp declines, or economic crises.

Limitations of the VIX

While the VIX is a valuable tool, it has limitations. It only provides a 30-day outlook, which may not capture longer-term trends or risks, which is what we focus on. It is also reactive, reflecting current market sentiments rather than predicting future events. Lastly, understanding and interpreting the VIX requires a good grasp of options pricing and market dynamics, which can be challenging for new investors.

As mentioned, we're not big fans of watching the market daily. And in fact, we don't use the VIX in our portfolio management services. So, now that you understand the VIX, in our opinion, you can in most cases ignore it and focus on the long-term.

Military Financers are Different

Just like your military job is different than a civilian job, your military finances are different than a civilian's. That's why we think you should work with a financial planner or advisor that deals with active and retired military members each and every day. If you'd like to see how we work with people just like you, use the button below to schedule a free initial consultation.

If you found this article useful, you might like the following blog posts:

Military Finances 101: What Are Real Estate Investment Trusts?


Military Finances 101: The Anatomy of an Index


Military Finances 101: Dollar-Cost Averaging






  1. https://www.td.com/ca/en/investing/direct-investing/articles/understanding-vix
  2. https://www.investopedia.com/articles/active-trading/070213/tracking-volatility-how-vix-calculated.asp
  3. https://www.investopedia.com/articles/optioninvestor/09/implied-volatility-contrary-indicator.asp

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