How to Read Market Sentiment with the VIX Index: A Key Guide Every Investor Should Know

There is always an indicator that appears when the stock market experiences upheaval. That is the VIX index(VIX). This measure, which reflects the level of market anxiety, can serve as an important signal for investment decisions. However, many individual investors still find it confusing to understand what the VIX index actually is and how to utilize it. In this article, I will explain the basics of the VIX index and practical ways to use it in an easy-to-understand manner.

Essential Knowledge Investors Must Know About the VIX Index

The VIX index is a volatility indicator created by the Chicago Options Exchange(CBOE) in the United States. Its official name is the CBOE Volatility Index, and it is often called the “Fear Index.”

The core concept is this: it quantifies how much investors expect the market to fluctuate in the future based on the price movements of S&P 500 index options. In other words, it shows whether investors are more concerned about “which direction” the market will move or “how much” it will shake.

For example, if the VIX is 20, it indicates that the market expects the S&P 500 to move within a ±20% range over the next year from its current price. A higher index value signifies greater anxiety among market participants, while a lower value suggests a calm and stable market.

How Does the VIX Respond When the Market Shakes?

Understanding the VIX requires grasping its relationship with market sentiment.

When uncertainty in the market increases, investors buy options and hedge(risk-averse) strategies to prevent losses. As these activities grow, option prices rise, and consequently, the VIX index also increases. Conversely, when the market is stable and investor sentiment is optimistic, the VIX remains at low levels.

Historically, at the onset of the COVID-19 pandemic in 2020, the VIX soared into the 80s, reflecting extreme investor anxiety. Similarly, during the 2008 financial crisis, recent US-China trade disputes, and geopolitical tensions, the VIX spiked sharply.

Experts use these characteristics to predict market bottoms. A high VIX indicates extreme fear, which paradoxically can present a good buying opportunity.

How to Diagnose Market Conditions Using VIX Levels

The VIX index’s numerical ranges can be interpreted as follows:

0~15: The market is excessively stable. While investor optimism is strong, this can be a warning sign. Overheated sentiment may lead to corrections or sharp declines in the future.

15~20: Normal market volatility. Most stable market environments see the VIX within this range.

20~30: Signifies noticeably increasing volatility. Investor anxiety is detected, and caution is advised.

30 and above: Fear phase. The market is likely to fluctuate rapidly, and investors are adopting defensive strategies. When exceeding 40, it indicates extreme anxiety.

As of May 2025, the current VIX stands at approximately 23.6. This exceeds the long-term average of 17.6, reflecting increased market volatility due to global interest rate hikes, geopolitical uncertainties, and trade disputes.

Practical Strategies for Using the VIX Index in Investment

While you cannot directly invest in the VIX index itself, indirect investments are possible through related futures, ETFs, and ETNs. However, these products have complex structures, high rollover(costs, and leverage risks, making them suitable mainly for short-term strategies or portfolio protection.

Turning Fear into Opportunity

Extreme fear, with the VIX exceeding 40, paradoxically offers a long-term buying opportunity. Statistically, stock markets tend to rebound 6~12 months after a sharp spike in the VIX. This approach leverages investor psychology’s extreme pessimism.

Using VIX for Portfolio Defense

When increased volatility is anticipated, you can reduce risk by using VIX-related ETFs or options. For example, holding a small amount of leveraged ETFs like VXX or UVXY can help offset short-term losses during market crashes.

Detecting Overheated Markets

If the VIX remains abnormally low for an extended period, it indicates excessive optimism among investors. In such times, preparing for a market correction is wise. Buying put options at low prices can also strengthen portfolio defense.

Precautions When Using the VIX Index

Do not rely solely on the VIX index for investment decisions. It should be combined with other market indicators such as the direction of the S&P 500, call/put ratios in options markets, and the CBOE Skew Index for a more accurate assessment.

Additionally, all VIX-related products are leveraged, and if the market moves contrary to expectations, losses can escalate rapidly. Especially during sudden market shifts, significant losses may occur, so careful position management is essential.

Conclusion: An Investor’s Attitude to Turn Volatility into Opportunity

The VIX index is a thermometer of market sentiment. Reading it timely and responding quickly are key to successful investing. However, even the most reliable indicator has structural costs due to leverage products, so always exercise caution.

Volatility is both a risk and an opportunity. If you can accurately interpret market trends and respond flexibly at the right moments, you can find profit opportunities even in unstable markets.