VIX index was created by Chicago Board Options Exchange (CBOE) in order to provide a measure of stock markets expected volatility in 30-day period. It is also known as the fear index or fear gauge. It is calculated using the implied volatility of SP500 options. Thus, the index is forward-looking as it measures expected volatility in the market quoted in percentage points. As a leading indicator, VIX reflects investors sentiment but is not perfect. In 2004 VIX futures were introduced and VIX options in 2006.
Through history, a VIX below 20% indicates a healthy and moderately risky market. An extremely low index can indicate a bearish sentiment among investors. A VIX higher than 20% signals increased fear and high-risk market. During the 2008 Financial Crisis, VIX came above 50%, reaching the highest 85%. Thus, the market expected prices to fluctuate 505 either side in 68% of the time. However, extreme percent does not persist as investors take positions to reduce the risk.
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