VIX: Understanding the fear thermometer in stock markets

Have you ever wondered why analysts constantly talk about a “fear indicator”? That thermometer is called the VIX, and in 2025 its reading has become more relevant than ever for any investor holding stocks in their portfolio.

What you need to know about the VIX

The VIX index is a mathematical calculation projecting how much volatility the U.S. stock market will experience over the next 30 days. Created by the Chicago Board Options Exchange (CBOE) in 1993, it measures market participants’ expectations using the prices of options traded on the S&P 500 index.

Unlike other indices that simply show where prices are today, the VIX tells you what the market expects to happen tomorrow. It updates in real-time throughout the trading session, becoming an essential tool for understanding risk sentiment.

The most interesting part: the VIX moves inversely to the S&P 500. When stocks rise quietly, the VIX drops. When prices fall sharply, the VIX spikes. This inverse correlation makes it a fascinating asset for protection or speculation.

Where this indicator comes from and why it matters so much

In 1986, researchers Menachem Brenner and Dan Galai proposed a revolutionary idea: if there is an index to measure the stock market, why not create one to measure uncertainty itself?

It took seven years for the CBOE to make it a reality. In 1993, they launched the VIX, using historical options data from 1986. The methodology was refined in 2003 with technological improvements, and since then it has become the global standard for measuring volatility.

During the 2008 crisis, the VIX reached highs of 89.53 points. In March 2020, during COVID-19 panic, it jumped from 57.83 to 82.69 points in a single session. These extreme peaks marked moments when investors feared the worst.

How this index really works

The VIX is based on call and put options on the S&P 500 that expire on Fridays, specifically those with expiration dates between 23 and 37 days. The portfolio constantly adjusts to maintain that fixed 30-day horizon, rebalancing every minute.

The calculation includes simple but powerful questions: How much are investors paying to hedge against drops? What prices are they asking for that insurance? These answers, mathematically aggregated, generate the VIX number.

The official formula considers the variance of the logarithmic returns of the S&P 500 and the “at-the-money” options (those with strike prices closest to the current price). Everything happens every 15 seconds, allowing the index to reflect instant changes in market sentiment.

Reading levels: What does each number mean?

• 0-15 points: Low risk. Investors are relaxed, heavily betting on stocks.
• 15-20 points: Moderate risk. Normal attention to risks.
• 20-25 points: Medium risk. Signs of caution start to appear.
• 25-30 points: High risk. Growing nervousness in markets.
• Over 30 points: Very high risk. Panic or extreme events.

2025: A year of surprises that spike volatility

The year started relatively calm, but on January 27th everything changed. The VIX surged 30% in a single session, breaking above 19 points, due to an unexpected announcement.

Chinese company DeepSeek introduced an open-source AI model that directly rivaled OpenAI’s GPT-4, but with greater computational efficiency and at a fraction of the cost. Investors who had heavily bet on U.S. tech companies got scared: Were the AI giants overvalued? Would the expected profitability materialize?

Sales were brutal and contagious. But the remarkable part was the recovery: within hours, the VIX stabilized again. UBS analysts pointed out two reasons: first, technical factors—investment funds and algorithms rebalanced positions simultaneously, amplifying the move but also correcting it quickly. Second, an excess of “long gamma” forced many options holders to readjust hedges, paradoxically helping to slow the fall.

But January was only act one. Donald Trump’s policies, with threats of tariffs against China and the European Union, keep markets on alert. Resisting inflation, Federal Reserve interest rate decisions, and attractive Treasury yields continue to fuel volatility.

Defensive actions against volatility: Strategies of professional investors

There are two completely different approaches to using the VIX.

Defensive strategy: Many investors buy VIX derivatives (options, futures, ETFs) when expecting declines in their stocks. If your portfolio is heavily linked to the S&P 500 and the market drops, the VIX position rises and offsets losses. It’s like insurance—expensive when everything is fine, but invaluable when it rains.

Speculative strategy: Other investors look specifically for moments of uncertainty to trade VIX derivatives, betting that volatility will continue. During the pandemic, those who bought VIX futures made money while others lost. It’s high risk but with potential for quick returns.

By 2025, both strategies make sense. Defenders can use the VIX to hedge against unpredictable policies from Trump. Speculators can leverage geopolitical and technological instability as short-term opportunities.

What is the technical forecast for the coming months?

According to current technical analysis:

Resistance zone: Between 20 and 22 points. If the VIX clearly breaks above, it could signal a new wave of volatility. This range has been the natural ceiling recently.

Support: Around 15-16 points. When the index falls toward these levels, it finds stability. Below that, the market interprets risk as minimal.

In derivatives and ETFs that track VIX futures, moving averages suggest short-term strength (the 50-day moving average is above the 200-day), but the RSI is in overbought territory around 65 points. The MACD remains positive but with converging lines, warning of a possible trend reversal.

All this means: beware of assuming volatility will keep rising indefinitely. The market could turn around quickly.

Possible scenarios for the rest of the year

Positive scenario: If Trump negotiates trade truce, inflation stays controlled, and the Federal Reserve continues lowering rates, the VIX will gradually decline toward 12-14 points. Stock markets would gain confidence.

Neutral scenario: Trade tensions persist without escalation, the economy grows slowly, and the VIX fluctuates between 16 and 22 points. Moderate volatility, no big surprises.

Negative scenario: If trade war intensifies, inflation rebounds, and unexpected rate hikes occur, the VIX could reach 30-40 points, approaching panic levels similar to 2020.

The important thing: although the VIX measures the volatility of the S&P 500, its effects are global. A spike in the VIX frightens investors in Europe, Asia, and Latin America alike, causing cascading capital outflows. That’s why even investors operating in local markets need to monitor the VIX.

How to invest in the VIX: The real options

You cannot buy the VIX directly like stocks. It’s an index, not a physical asset. Instead, you must trade through derivatives:

VIX futures: Contracts that settle in cash based on the index value at a future date. Investors buy (long positions) when expecting volatility, and sell (short positions) when expecting calm.

ETFs and ETNs: Exchange-traded funds that replicate movements of VIX futures. More accessible than direct futures, though with maintenance costs.

VIX options: Contracts giving the right to buy or sell VIX futures at a set price. Higher leverage but more complex.

The three basic steps to start:

1. Open an account on a regulated trading platform
2. Deposit funds
3. Start trading VIX derivatives

Final reflection: The VIX as a tool, not a perfect predictor

The VIX is extremely useful for measuring the current risk of the U.S. stock market. Its inverse correlation with the S&P 500 makes it a reliable sentiment indicator.

But here’s the uncomfortable truth: although it measures 30-day volatility, that doesn’t mean it’s 100% accurate in predicting where stocks will go. The market is influenced by politics, global macroeconomics, technology, and unforeseen events. Some scientific studies have questioned its predictive power; others confirm it. The reality is that it’s a useful tool, not an oracle.

To invest responsibly in the VIX: first understand the S&P 500 and its component companies. Comprehend economic cycles. Stay informed about Federal Reserve policies. And most importantly: never invest more money than you can afford to lose.

In 2025, with maximum political, technological, and economic uncertainty, the VIX will likely remain volatile. That’s an opportunity for some and a risk for others. You decide which you are.