VIX is the ticker symbol for the Chicago Board Options Exchange Volatility Index, a popular measure of the implied volatility of stock index options. Referred to by some as the fear index, it represents one measure of the market's expectation of volatility over the next 30 day period.

Specifications

The VIX is calculated and disseminated in real-time by the CBOE. It is a carefully weighted blend of prices for a range of options on the S&P 500 index. The components include both at-the-money and away-from-the-money options, taken from the front month and second month expirations. The goal is to estimate the implied volatility of a synthetic, at-the-money option on the S&P 500 index, with 30 days to expiration.

Interpretation

The VIX is quoted in terms of percentage points and translates, roughly, to the expected movement in the S&P 500 index over the next 30-day period, on an annualized basis. For example, if the S&P 500 is currently at 1000, and the VIX is at 12, then the one can infer that the index option markets expect the S&P 500 to move up or down 12% / 12 = 1% over the next 30-day period. That is, index options are priced so that a move to either 990 or 1010 in the next month are the most likely outcomes.

Investors believe that a sharp increase in the VIX translates into a greater degree of market uncertainty, while a drop in the VIX is consistent with greater stability.

Note that because the VIX is quoted as a percentage rather than a dollar amount, there are no highly liquid instruments that will realize the VIX's "return", such as ETFs can do for regular indices. Nonetheless, VIX-based derivative instruments do exist, including:

• VIX futures contracts, which began trading in 2004, and
• exchange-listed VIX options, which began trading in February 2006.

Criticism

Often, when commentators discuss the option markets, the VIX is used to represent overall sentiment for equity options. However, to many practitioners, the relationship of the VIX to individual equity options can be easily overstated. It often appears that different dynamics drive the volatility of index options compared to that of equity options, and the two can often be uncorrelated. In particular, the VIX is limited to a 30-day period, while for most non-index equity options, the most liquidity is usually found in the 2 to 6-month maturities. In addition, volatility is often a function of market sector. For instance, volatility can be high in energy stocks, while it is falling in the transportations, and vice-versa. Using a single number such as the VIX to represent the volatility for all equity options is usually overly simplistic.

External links

• CBOE VIX Product Introduction ^*
• Izzy Nelken. (2004) "From Log Contracts to the CBOE's New VIX Index -- How a Completely Theoretical Idea Turned Into a Very Practical Tool." Presentation ^*
• Keith Black. (2005) “How the VIX Ate My Kurtosis." Presentation. ^*
• Joanne Hill and Sandy Rattray. (2004) "Volatility as a Tradable Asset: Using the VIX as a Market Signal, Diversifier and for Return Enhancement." Presentation. ^*
• Matthew T Moran, (2004) "Review of the VIX Index and VIX Futures." Journal of Indexes, October/November 2004. pp. 16 – 19. ^*
• Robert E. Whaley, (2000). "The Investor Fear Gauge," The Journal of Portfolio Management, pp. 12-17. ^*

Derivatives | Mathematical finance