What volatility indices actually measure

Headline volatility indices are calculated from the prices of index options across a range of strikes. The output is an annualised percentage: the market's collective estimate of how far the underlying index might travel over the coming month, expressed as a standard deviation.

Magnitude, not direction

A rising reading says option buyers are paying more for the right to transact at fixed prices. That happens when investors expect a wider range of outcomes — which, in equity markets, historically coincides with falls, because protection is bought more urgently than upside. The index itself contains no directional information.

Realised versus implied

Realised volatility looks backwards at what actually happened. Implied volatility looks forwards at what options are priced for. The gap between them is where volatility trading lives, and it explains why a calm market can still carry expensive options ahead of a scheduled event such as a central bank meeting.

Why the level alone tells you little

Volatility clusters: quiet periods follow quiet periods until they do not. A low reading is not a safety signal; it often accompanies crowded positioning that amplifies the eventual adjustment. The useful information is usually in the change and in the shape of the curve across expiries, not in a single print.