The VIX measures the S&P 500's expected 30-day volatility, calculated from options prices in real time. When the market falls, demand for protective puts rises and the VIX spikes; when it rises, put demand drops and the VIX falls. Traders use the VIX to see who controls the market: buyers or sellers.
So the volatility index is a measurement of the market's expected volatility over the next 30 days in the S and P. It is calculated on a real time basis and the pricing of the VIX is derived from the positioning from the SPX options market over the 30 day time frame. As the demand for puts increases on the spx, the price of VIX goes up. On the flip side the opposite when the SPX put demand goes down, the value of the VIX also goes down. When the S and P goes down, the demand for puts will increase, the value of the VIX will go up. On the flip side, when ES moves to the upside, the VIX price will go down. When VIX goes down in value, pressure gets taken off of the S and P. When VIX goes up in value, pressure is put onto the es. By using the pricing of the VIX VIX it gives us a good understanding of which side of the spectrum is in control.
