Top
Reference

Definitions V

VIX

The VIX or, more fully, the CBOE Volatility Index, indicates how widely spread are future expectations of the S&P 500 index level.

Most news source call the VIX a “fear gauge”. However it measures volatility, not direction, and could more accurately be called an uncertainty gauge.

The home page for the VIX is http://www.cboe.com/micro/vix/introduction.aspx.

A full definition is given in a 15 page white paper at http://www.cboe.com/micro/vix/vixwhite.pdf. The intuitive idea behind VIX is that if options with strike prices far from an average strike price have high cost, investors are expecting high volatility. The calculation standardizes on implied volatility 30 days out, and uses put and call option prices on the S&P 500 index for the two months that bracket the day 30 days away. The calculation is made for each of those dates, and a value for 30 days out is interpolated. For each date, the calculation is complex in detail but simple in core conception. First an implied future index level is calculated: basically the value at which puts and calls are equally priced. Second, for a band of strike prices bracketing the implied future index level, the main contribution to the VIX is a sum of (option price)*(strike price interval)/(strike price)**2.