The volatility index, also known as the VIX, is a forward-looking index, measuring implied volatility based on S&P 500 options. The VIX spikes during times of uncertainty, and there's complex mathematical equation at the core of the calculations. Investors may use the VIX to help them make investment decisions. Watch the video above to learn more about how the VIX measures fear, the mechanics behind implied volatility and why it matters to investor portfolios.

The volatility index, also known as the VIX, essentially takes a reading of the stock market’s blood pressure, measuring investors’ fear.

The VIX can spike when investor concerns are heightened by events like the raising of interest rates by the Federal Reserve or the Covid-19 pandemic.

“It’s just a unique tool that we can actually quantify that [concern],” Lindsey Bell, chief markets and money strategist at Ally Financial, told CNBC.

The VIX is a forward-looking index that weighs volatility based on trading in S&P 500 options.

“It’s measuring implied volatility over the next 30 days, and that’s derived from option activity,” said Jason Snipe, founder and chief investment officer at Odyssey Capital Advisors. “That’s the catalyst for what moves [the VIX] in either direction.”

Investors can use the VIX to help them make buying and selling decisions, or they can indirectly invest in it.

“The most important thing is having a plan for whatever you are investing for, whether you are a trader or an investor,” said Tiffany McGhee, chief investment officer and CEO of Pivotal Advisors.

» Subscribe to CNBC: https://cnb.cx/SubscribeCNBC
» Subscribe to CNBC TV: https://cnb.cx/SubscribeCNBCtelevision

About CNBC: From 'Wall Street' to 'Main Street' to award winning original documentaries and Reality TV series, CNBC has you covered. Experience special sneak peeks of your favorite shows, exclusive video and more.

Connect with CNBC News Online
Get the latest news: https://www.cnbc.com/
Follow CNBC on LinkedIn: https://cnb.cx/LinkedInCNBC
Follow CNBC News on Facebook: https://cnb.cx/LikeCNBC
Follow CNBC News on Twitter: https://cnb.cx/FollowCNBC
Follow CNBC News on Instagram: https://cnb.cx/InstagramCNBC

#CNBC

How To Make Money During Market Swings