VIX

VIX, or Volatility Index, is the ticker symbol for the implied volatility of S&P 500 index options listed on the Chicago Board Options Exchange. The VIX has supplanted the older VXO as the preferred volatility index. 

VIX

VIX, or Volatility Index, is the ticker symbol for the implied volatility of S&P 500 index options listed on the Chicago Board Options Exchange.

Due to its popularity as an investor sentiment indicator and market volatility, the VIX has supplanted the older VXO as the preferred volatility index. VXO was a measure of implied volatility calculated using 30-day S&P 100 index at-the-money options. The VIX Index was developed by Prof. Robert E. Whaley in 1993 and is a registered trademark of the CBOE.

 


VIX Calculation

VIX is a weighted blend of near-term market volatility expectations for a range of options on the S&P 500 index.  It is calculated as the square root of the par variance swap rate for a 30 day term initiated today. The VIX is quoted as an annualized standard deviation and is published in real-time by the Chicago Board Options Exchange.

S&P 500 VIX 2010 to 2015

Issues

Despite its relatively sophisticated composition, the predictive power of VIX is similar to that of past volatility measures or simple standard  deviation



Application of VIX

The VIX is quoted in percentage points and represents the anticipated movement in the S&P 500 index over the next 30-day period, which is then annualized. 

The VIX is often called the fear index, but a high VIX is not necessarily bearish for stocks.  Instead, the VIX is a measure of perceived market volatility in either direction. Increases in upside stock option call prices raises the VIX just as does the growth in downside stock put option premiums.

High VIX readings mean investors believe there is significant risk that the market will move sharply, either downward or upward. Only when investors perceive neither significant downside risk nor significant upside potential will the VIX be low.

There are a number of VIX-based derivative instruments, including:

  • VIX futures contracts, which began trading in 2004
  • Exchange-listed VIX options, which began trading in February 2006
  • VIX futures based exchange-traded notes and exchange-traded funds, such as:
  • S&P 500 VIX Short-Term Futures ETN (NYSE: VXX) and S&P 500 VIX Mid-Term Futures ETN (NYSE: VXZ) launched by Barclays iPath in February 2009.
  • S&P 500 VIX ETF (LSE: VIXS) launched by Source UK Services in June 2010.
  • VIX Short-Term Futures ETF (NYSE: VIXY) and VIX Mid-Term Futures ETF (NYSE: VIXM) launched by ProShares in January 2011.

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