- The CBOE Volatility Index has spiked more than 80% since President Donald Trump’s inauguration. Wall Street’s “fear gauge,” which measures expected volatility using S&P 500 put and call options, is not without its flaws. Nonetheless, the scheduled announcement of “reciprocal” tariffs early next month looms large for markets.
It’s not hard to decipher why Wall Street’s “fear gauge” has been on the rise. President Donald Trump’s on-again, off-again tariff salvos have spooked markets, and the CBOE Volatility Index, or VIX, has spiked more than 80% since the week of his inauguration. About 20% of that increase came during Monday’s selloff, though the index cooled on Tuesday afternoon as stocks reversed their losses from earlier in the day after Ukraine agreed to a U.S.-led ceasefire plan if Russia accepts the deal.
The VIX, which aims to measure expected volatility over the next 30 days using the prices of call and put options on the S&P 500, fell back toward the mid-20s on Tuesday, though it remained above its long-run average of 19.5. The volatility index hit a 2025 low of 15 on Jan. 24, four days after Trump returned to the Oval Office. Many investors initially believed the president would prioritize tax cuts and deregulation over fundamentally reshaping American trade relations, but markets are now contending with the possibility that view could be greatly mistaken as the president declines to rule out a recession.
Still, when it comes to the VIX, a level of 30 or above is typically interpreted as a sign of true panic. The index has spiked even more dramatically on several occasions recently, only for the “fear gauge” to rapidly retrace.
The VIX surged 74% in December after the Federal Reserve surprised the market by suggesting it would pause cuts to interest rates. That marked the second-greatest surge in the index since it was introduced in 1993 (with calculations going back to the start of the decade). It peaked above 65, a post-pandemic high, in early August amid the unwind of the yen carry trade. In just over a week, however, the VIX had moved back below 20 as recession fears eased and a bull market resumed.
That said, policy uncertainty has clearly been weighing on stock prices. Traders will wait in trepidation for Apr. 2, said Sam Stovall, chief investment strategist at CFRA Research, when Trump’s team is set to unveil “reciprocal” tariffs on countries that, according to the administration, maintain unfair trade practices relative to the U.S.
There’s always a chance Trump declares victory and backs off, Stovall noted, referencing the bull case that the president still sees tariffs mainly as a negotiating tactic. But investors may also be thinking about the Smoot-Hawley tariffs of 1930, he said, which placed trade barriers around the world and greatly exacerbated the Great Depression.
“Nobody really expects that,” Stovall said. “Certainly nobody wants that, but it’s something that people fear.”
How the VIX works
The VIX is built to try to capture this uncertainty among market participants. The index is calculated throughout the day using standard S&P options, which expire on the third Friday of every month, along with weekly options that expire on all other Fridays. The expiry dates on all these options lie within a period of 23 to 37 days, ideally providing a window into the market’s view for the month ahead.
But those derivatives aren’t traded as much as they used to be as investors increasingly use zero-day options, which expire at the end of a single trading session, to hedge or make bets on price movements. As Benjamin Bowler, head of Bank of America’s global equity derivatives research team, explained in August, the illiquidity of S&P options that make up the VIX contributed to its dramatic spike that month. The widening of these options’ bid-ask spreads—the difference between the highest price that a buyer is willing to pay and the lowest price a seller will accept—caused the VIX to overstate investor uncertainty, he said.
“A VIX at 65 may not be equivalent to a VIX at 65 10 years ago, when liquidity wasn’t as fickle as it is today,” Bowler said at the time.
In other words, a high reading on the VIX might be a less useful metric of market panic than it once was. Regardless, the index now sits well below half the level it hit in August. Meanwhile, Stovall said on Monday he wouldn’t be surprised if the market’s fears quickly blow over. He also cited a famous quote from American economist and Nobel Prize winner Paul Samuelson: “The stock market has predicted nine out of the last five recessions.”
“So investors could think that, ‘You know what? The market tends to pop after a drop,’” Stovall said, “and so they wouldn’t be surprised if we end up seeing the market sharply in the green as this week progresses.”
The S&P initially fell over 1.4% on Tuesday after Trump announced he would hike tariffs on Canadian steel and aluminum to 50%. Those losses were erased, however, after news that Ukrainian and American delegations have reached an agreement for a 30-day ceasefire if Russia accepts the plan.
