The VIX estimates how volatile the market will be by aggregating the weighted prices of S&P 500 puts and calls over a wide range of strike prices. Other inputs entering the calculation are time to expiration and risk-free interest rate. VIX is calculated from the prices of a particular basket of S&P 500 options, whose value to their holders depends importantly on the future level of S&P 500 volatility. Since volatility is often associated with negative stock market performance, volatility investments can be used to hedge risk. This result is divided by the difference of the number of minutes to expiration of the next term option (61,920) minus the number of minutes to expiration of the near term option (21,600). This is to eliminate illiquid far out of the money options which can imply extreme values of volatility and would therefore distort the final VIX value. Clearly, the order of operations is critical in the calculation and, for most of us, calculating the VIX isn’t the way we would choose to spend a Saturday afternoon. And if we did, the exercise would certainly take up most of the day. The VIX is expressed as an annualized volatility measure. VIX is the ticker symbol and the popular name for the Chicago Board Options Exchange's CBOE Volatility Index, a popular measure of the stock market's expectation of volatility based on S&P 500 index options. 32 and 67 days), the first month’s weight was greater than 1 and the second month’s weight was negative. The result is then multiplied by the result of the difference between the number of minutes to expiration of the next term option (61,920) minus the number of minutes in 30 days (43,200). For example, if the VIX index is 22, it means that a hypothetical S&P500 option with 30 days to expiration has annualized implied volatility of 22%. But the questions are much larger. Your Toolkit for Comprehensive Risk Management. Failing to do the proper preparation and taking a prudent approach to investing can have a more detrimental result on your personal bottom line than making a mathematical error in your VIX calculation. To facilitate and encourage these investments, the CBOE developed the VIX, which tracks market volatility on a real-time basis. Of course, volatility can also mark rapidly rising markets. The calculation for the Volatility index looks complicated but is quite simple once you have all the variables. The rest of this page explains individual steps in more detail. The selection of strikes goes from the at the money strike up (for calls) and down (for puts), until two consecutive strikes with zero bid price are found in each direction. This schedule of expirations forces a weekly shift in the VIX calculation to longer dated options. More specifically, the VIX is calculated by looking at the midpoints of real-time S&P 500 option bid and ask prices. It is calculated and disseminated on a real-time basis by the CBOE, and is often referred to as the fear index or fear gauge. So if you short when the vix and its futures are quite higher than their mean you should do ok if ⦠ETNs that track volatility include the iPath S&P 500 VIX Short-Term Futures (VXX) and the VelocityShares Daily Inverse VIX Short-Term (XIV). Until October 2014, the VIX calculation used monthly options only. The question is, how was VIX calculated before 2014, when they used traditional SPX options only, expiring every month on the 3rd Friday? VIX options and futures provide popular vehicles through which sophisticated traders can place their hedges or implement their hunches. The ticker symbol is VXEWZ. Professional investors use these on a routine basis. The CBOE published a white paper ⦠These include hedge funds, professional money managers and individuals that make investments seeking to profit from market volatility. Send me a message. The two expirations are referred to as “near-term” and “next-term”. Let me try to explain this conceptually in plain English. The result is multiplied by the volatility of the option, represented in the example by 0.066472. The old version of the VIX using monthly options only is still being calculated and available under the symbol VIXMO. The calculations behind each part of the equation are rather complex for most people who don’t do math for a living. The square root of that number multiplied by 100 equals the VIX. Contrary to what many people believe, the VIX is not calculated using Black-Scholes or any other option pricing model. S&P100 (OEX) option prices were used. While the VIX index is calculated using prices of S&P500 options, the VVIX index is calculated using VIX options. Although the formula is complex, there are a few basic points to understand about how the VIX is calculated: Implied volatility: Technically, a VIX reading expresses implied volatility, or future expectations. Contrary to what many people believe, the VIX is not calculated using Black-Scholes or any other option pricing model. This rollover happens every week. Volatility ETF options include the ProShares Ultra VIX Short-Term Futures (UVXY) and ProShares VIX Mid-Term Futures (VIXM). The VIX is a benchmark index designed specifically to track S&P 500 volatility. The VIX is calculated using a rather complex formula to derive expected volatility by averaging the weighted prices of out-of-the-money puts and calls. Today VIX is computed based on near- and next- term options series which fall into the time period of [23, 37] days. Once weekly S&P 500 options became liquid enough, it was logical for CBOE to start using them from 6 October 2014. The VXFXI is calculated with the VIX Index methodology. This was to eliminate options in the last days before expiration, whose prices sometimes behave in strange ways. Of course this is a very simplified explanation. The VVIX index is calculated using exactly the same logic as the VIX index. For each option in the set described above, expected variance is calculated from the option’s price (premium) and strike relative to spot S&P500 index value. We divide this result by the difference of the number of minutes to expiration of the next-term option (61,920) minus the number of minutes to expiration of the near-term options (21,600). Forward rate agreements (FRA) are over-the-counter contracts between parties that determine the rate of interest to be paid on an agreed upon date in the future. Historical Volatility. Fortunately, you will never have to calculate the VIX because the CBOE does it for you. This page explains the logic of VIX calculation and some of the underlying assumptions and parameters. Daily historical data is available starting from 1990 for the VIX and from 1986 for VXO. [Episode 580] Option Alpha. Have a question or feedback? Investopedia uses cookies to provide you with a great user experience. Just as in the first calculation, the result is multiplied by the volatility of the option, represented in the example by 0.063667. They are also far too complex to fully explain in a short article, so let’s put some numbers into the formula to make the math easier to follow: σ2= 21,600525,600×0.066472×(61,920−43,20061,920−21,600)+σ2= 61,920525,600×0.063667×(43,200−21,60061,920−21,600)×525,60043,200σ2= 0.0643180321σ= 0.253610\begin{aligned} \sigma^2 =& \ \tfrac{21,600}{525,600} \times 0.066472 \times \left ( \tfrac{61,920 - 43,200}{61,920 - 21,600} \right ) +\\ \phantom{\sigma^2 =}& \ \tfrac{61,920}{525,600} \times 0.063667 \times \left ( \tfrac{43,200 - 21,600}{61,920 - 21,600} \right ) \times \tfrac{525,600}{43,200} \\ \sigma^2 =& \ 0.0643180321 \\ \sigma =& \ 0.253610 \\ \end{aligned}σ2=σ2=σ2=σ= 525,60021,600×0.066472×(61,920−21,60061,920−43,200)+ 525,60061,920×0.063667×(61,920−21,60043,200−21,600)×43,200525,600 0.0643180321 0.253610, VIX=100×σ=25.36VIX = 100 \times \sigma = 25.36VIX=100×σ=25.36. Most investors familiar with the VIX commonly refer to it as the “fear gauge,” because it has become a proxy for market volatility. How Is The VIX Calculated? How is the VIX calculated? Every week a series of SPX options expire. That is what it is now, when they use SPX weekly, so they have options expiring every week. The VIX is interpreted as annualized implied volatility of a hypothetical option on the S&P500 stock index with 30 days to expiration, based on the prices of near-term S&P500 options traded on CBOE. Until September 2003 the VIX was calculated in an entirely different way, even using a different underlying: The pre-2003 method index is still being calculated and published by CBOE under the symbol VXO. The index is calculated in real-time by the CBOE based on the prices of options on the S&P 500 index. CBOE Brazil ETF Volatility Index: This volatility index is calculated with the same VIX methodology to reflect the implied volatility in the EWZ ETF, an exchange-traded fund that is based on the Brazilian equity market. The weights of the two variances depend on how close or far each expiration is from the desired 30-day mark (the closer, the greater weight). VVIX is the VIX of VIX. The rule was two nearest monthly expirations with at least one week left to expiration. VXX tracks the VIXâs moves at around 50% (a 1% move in VIX will give approximately a 0.5% move on VXX). The CBOE changed the way the VIX® was calculated on October 6th, 2014-asserting the change would provide a more accurate assessment of expected volatility.The new ⦠The time to expiration for a particular option is calculated very precisely in minutes. Trading or investing whether on margin or otherwise carries a high level of risk, and may not be suitable for all persons. Two different variances for two different expirations are then interpolated to get 30-day variance. For the VIX, they don't use options on a stock, they use options on the S&P 500 index. Crucially, the VIX is a forward-looking index, measuring implied volatility rather than realized or actual volatility, which are calculated using historical price data. Furthermore, only options which have non-zero bid are used. The previously next-term expiration becomes the new near-term expiration and the next available longer expiration is added as the new next-term. Whether the direction is up or down, volatility investments can also be used to speculate. The Cboe Volatility Index, or VIX, is an index created by Cboe Global Markets, which shows the market's expectation of 30-day volatility. Just in case you’re wondering where 30 days came from, the VIX uses. Until October 2014 when only monthly expirations were used, if both expiration months had more than 30 days left (e.g. The result is added to the sum of the time calculation for the second option, which is 61,920 divided by the number of minutes in a 365-day year (526,600). Exchange-traded funds offer a somewhat more familiar vehicle for many investors. By remaining on this website or using its content, you confirm that you have read and agree with the Terms of Use Agreement just as if you have signed it. XIV is just the inverse of VIX If you are not familiar with the VIX index, you may first want to see a more basic explanation: What is VIX? Exact formulas are available in a short pdf named VIX White Paper on the official website of CBOE. There are pros and cons to each of these investment vehicles that should be thoroughly evaluated before making investment decisions. Volatility is an input when calculating an option's price, but in this case the volatility is calculated by taking the option price from the market, then (in basic terms) rearranging the equation to calculate volatility. It is calculated in real-time based on the live prices of S&P 500 index. While volatility is usually quoted in percent, the VIX is volatility times 100. Cboe VIX FAQ. The current method uses S&P500 (SPX) options. Any information may be inaccurate, incomplete, outdated or plain wrong. The data used for VIX calculation are bid and ask quotes of short term S&P500 options. Volatility is useful to investors, as it gives them a way to gauge the market environment. The end of the period is the moment when the exercise-settlement value is being determined, which is the open (8:30 am Chicago time) on the settlement day for monthly S&P500 options (usually the third Friday of a month) and close of trading (3:00 pm) for weekly options. The VIX is actually based on option prices of the S&P 500 and is calculated using the SPX. In the money options are not included. This list of Frequently Asked Questions (FAQs) is a representation of questions commonly asked about the VIX Index and derivatives listed on the VIX Index. VIX options track the VIX in a time variable fashion. Loading... Unsubscribe from Option Alpha? End of Day SPX value was 2746.56 and using that as the base. The Macaulay duration is the weighted average term to maturity of the cash flows from a bond. All»Tutorials and Reference»VIX and Volatility Products, You are in Tutorials and Reference»VIX and Volatility Products. The VIX is calculated using a formula to derive expected volatility by averaging the weighted prices of out-of-the-money puts and calls. Macroption is not liable for any damages resulting from using the content. There are other factors like which option(s) to use, how to handle cases where different options on the index yield different volatilities etc. As one might expect, investment vehicles used for this purpose can be rather complex. The VIX is a benchmark index designed specifically to track S&P 500 volatility. By using Investopedia, you accept our. Having calculated the 30-day variance, we need to take the square root to transform variance into standard deviation (which is the traditional way how volatility is quoted and the VIX is no exception). Therefore, two different interest rates may be used for the two different expirations which enter VIX calculation. The first set of numbers to the right of the “=” represents time. The VIX is calculated using SPX options that have a âuse byâ date. The VIX was created by the Chicago Board Options Exchange (CBOE), which bills itself as “the largest U.S. options exchange and creator of listed options.” The CBOE runs a for-profit business selling (among other things) investments to sophisticated investors. The CBOE Volatility Index is not an ETF, and it cannot be bought and sold, only futures and options contracts that derive their value from its price and time to expiry can be purchased. The Agreement also includes Privacy Policy and Cookie Policy. Exchange-traded notes – a type of unsecured, unsubordinated debt security – can also be used. This made the window around the 30 days target narrower and the calculation more precise. No other options beyond such two consecutive zero bid strikes are included. How Is The VIX Calculated? Basic Logic of VIX Calculation. Regardless of purpose (hedging or speculation) or the specific investment vehicles chosen, investing in volatility is not something to jump into without taking some time to understand the market, the investment vehicles and the range of possible outcomes. The Vix - or the CBOE (Chicago Board Options Exchange) Volatility Index to give its full name - is calculated using options traded on the S&P 500. Only at-the-money options were included. The only difference between VVIX and VIX is in the underlying of the options used for the calculation. The CBOE provides the following formula as a general example of how the VIX is calculated: σ2=2T∑iΔKiKi2eRTQ(Ki)−1T[FK0−1]2\sigma^2 = \frac{2}{T}\sum_i \frac{\Delta K_i}{K_i^2}e^{RT} Q(K_i) - \frac{1}{T}\left [\frac{F}{K_0} - 1\right]^2σ2=T2∑iKi2ΔKieRTQ(Ki)−T1[K0F−1]2. The spot price of the VIX is calculated on a minute to minute basis to keep up with the fast-paced markets. The old method used an option pricing model, while the current method uses a direct formula. Because the target time horizon for the VIX index is 30 days, two consecutive expirations with more than 23 days and less than 37 days are used. The 30-day variance is calculated by interpolating the total variances of the two expirations. Instead, there is a formula which directly derives variance from prices of different options with the same time to expiration. The interest rate used in the VIX calculation is the bond-equivalent yield of US T-bills which mature closest to the particular option expiration. Introduced in 1993, the VIX Index is now an established and globally recognized gauge of U.S. equity market volatility. Under the current method, a wide range of at-the-money and out-of-the-money strikes enters VIX calculation. Leverage can work against you as well as for you. The most difficult part is gathering all the information to be plugged into the formula. It also provides investment opportunities. If you don't agree with any part of this Agreement, please leave the website now. Formally known as the CBOE Volatility Index, the VIX is a benchmark index designed specifically to track S&P 500 volatility. ... VIX Index Explained | Options Trading Guide - Duration: 13:25. You can read the technical details here, https://www.cboe.com/micro/vix/vixwhite.pdf. It is a measure of the perception of risk in the stock markets. More precisely, the Vix is a model-free measure of volatility implied by options traded on the S&P 500 index. It makes sense because the vix is calculated as a ratio. The contribution of individual options to the calculation of total variance of an expiration depends on the option’s price, the strike price, and the average strike price increment of neighboring strikes. The VIX Index is a measure of expected future volatility. How is the VIX calculated? Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. Once the January VIX future settles, VXX's movements will then be derived from the 30-day VIX future that is calculated from the February (first-month) and March (second-month) VIX futures. Here's a look at the calculations behind the VIX, courtesy of examples and information provided by the CBOE. As soon as the near-term options get less than 24 days to expiration, they are no longer used. The set of options for each expiration includes both call and put options, but only at the money and out of the money strikes. When market volatility spikes or stalls, financial websites, bloggers, social media, newspapers and television commentators all refer to the VIX®. Next we repeat the process covered in step 3, multiplying the result of step 4 by the difference of the number of minutes in 30 days (43,200), minus the number of minutes to expiration of the near-term options (21,600). Click on the questions below to display the answer. So we use the smallest difference in strike prices. The exact way how volatility was derived from option prices was different. How is the VIX Calculated? The two methods of course produce different index values, although the differences are not that big and the two indices (VIX and VXO) react to the same market conditions in a similar way. The sum of all previous calculations is then multiplied by the result of the number of minutes in a 365-day year (526,600) divided by the number of minutes in 30 days (43,200). This figure is determined by using the. It takes less than a minute. Volatility is useful to investors, as it gives them a way to gauge the market environment; it also provides investment opportunities. 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