VIX

The CBOE Volatility Index (VIX)^[1] measures the market’s expectation of future volatility implied by S&P 500 stock index (SPX) options prices. In other words, VIX uses options pricing as a way to measure perceived market risk and uncertainty. The VIX is a 30-day risk forecast of stock market volatility and typically has an inverse relationship with the S&P benchmark as it tracks option prices that investors are willing to pay as a protection on the underlying stocks.^[2]

Since its introduction in 1993, VIX has been considered by many to be an important barometer of investor sentiment and market volatility.^[3][4][5] It is often referred to as the "investor fear gauge," which is somewhat of a misnomer. Dividing the value of the S&P 500 by the VIX ratio is said to give the confidence level in relation to the market. The higher the ratio, the higher the confidence.^[6]

Futures on the CBOE's VIX were introduced on the CBOE Futures Exchange (CFE) in 2004, and are the most actively traded futures contract on the exchange. CBOE reported on June 16, 2011, that VIX futures topped 100,000 contracts traded in one day, a single-day volume record for the futures contract.^[7] On March 6, 2012, CBOE announced that open interest for VIX futures hit a new record with more than 280,000 contracts.^[8]

Subsequently, in February 2006, options on the CBOE Volatility Index (VIX) began trading on the Chicago Board Options Exchange. The VIX options contract was the first product on market volatility to be listed on a Securities and Exchange Commission-regulated securities exchange. The contract hit a milestone on March 15, 2011, with a record 1,038,002 contracts traded in a single day.^[9]

On March 2, 2009, CBOE introduced Mini-VIX futures, with a contract size of $100 times the index - one-tenth the size of the VIX contract.

Contents 1 Background 2 Awards 3 VIX Prices 4 Resources 5 References

Background

In an article entitled "Fear and Greed in Global Asset Allocation," in the spring 2000 issue of The Journal of Investing, the VIX was characterized as "a good indicator of the level of fear or greed in U.S. and global capital markets." When investors are fearful, the article noted, the VIX level is "significantly higher than normal."^[10]

A research report by CBOE, entitled "VIX: Fact and Fiction ^[11], released in 2009, explained some of the most common myths surrounding the VIX, many of which had arisen during the fall and winter of 2008 during which the VIX level rose to record highs.

The original VIX index, developed by Professor Robert E. Whaley^[12] and introduced by CBOE in 1993, was constructed using the implied volatilities of eight different OEX option series so that, at any given time, it represented the implied volatility of a hypothetical at-the-money OEX option with exactly 30 days to expiration. In 2003, this construction changed.^[13]; it still measures the market's expectation of 30-day volatility, but in a way that better conforms to more recent thinking and research among industry practitioners. The "new" VIX, then:

• Is based on S&P 500 index option prices and "incorporates information from the volatility 'skew' by using a wider range of strike prices rather than just at-the-money series." (The original VIX used only at-the-money options.)
• Uses a newly developed formula to derive expected volatility directly from the prices of a weighted strip of options. (The original VIX extracted implied volatility from an option-pricing model.)
• Uses options on the S&P 500 Index, which is the primary U.S. stock market benchmark. (The original VIX was based on S&P 100 Index - OEX - options prices.)

Awards

In 2004, the CBOE Volatility Index (VIX) Futures won the Most Innovative Index Product Award at the Ninth Annual Super Bowl of Indexing Conference.

In 2006, Options on the CBOE Volatility Index (VIX) won the Most Innovative Index Product at the presentation of the William F. Sharpe Indexing Achievement Awards at the Eleventh Annual Super Bowl of Indexing Conference.

VIX Prices

A spreadsheet with historical and current price history data is available at CBOE Historical Data

Resources

• "CBOE Volatility Index (VIX): What's Been Making It Such a Bumpy Ride?" -- CBOE social media release [1], May 28, 2010.

• "CBOE Volatility Index: One Year after the Financial Crisis (Where It's Been, Where It Is Now and What It Says)" -- CBOE social media release [2], October 29, 2009.

• "“VIX Futures and Options – A Case Study of Portfolio Diversification During the 2008 Financial Crisis,” University of Massachusetts at Amherst, May 2009: Full Report [3]; Two-page Summary[4]; Press Release [5]

• "VIX: Fact and Fiction," [6], Chicago Board Options Exchange, May 1, 2009

• 2008 VIX Records and Milestones," CBOE [7]

• The CBOE Futures Exchange offers a monthly newsletter Futures in Volatility that provides a VIX market summary and analysis by options expert Larry McMillan. Futures In Volatility

• The VIX, CIV, and MFIV: Measuring Up The Accuracy Of Option-Based Predictors Of Volatility - Kellogg School of Management, September of 2008

• CNN Money.com/Fortune How To Make Money On Volatility, - Fortune, January 2008

• Antognelli, Ferreira, McArdle, and Traub. "Fear and Greed in Global Asset Allocation." The Journal of Investing. (Spring 2000), pp. 27—32.

• Arvedlund, Erin. "Calm Before the Storm? Low Volatility Often Precedes Market Downturn." Barron's Jan. 28, 2002.

• Black, Keith H. "Improving Hedge Fund Risk Exposures by Hedging Equity Market Volatility, or How the VIX Ate My Kurtosis." The Journal of Trading. (Spring 2006).

• Connors, Larry. "Timing Your S&P Trades with the VIX." Futures (Jun 2002): pp. 46—47.

• Copeland, Maggie. "Market Timing: Style and Size Rotation Using the VIX." Financial Analysts Journal, (Mar/Apr 1999); pp. 73—82.

• Daigler, Robert T., and Laura Rossi. "A Portfolio of Stocks and Volatility." The Journal of Investing. (Summer 2006).

• Derman, E., M. Kama, I. Kani, and J.Zou, 1996, "Valuing Contracts with Payoffs Based on Realized Volatility," Global Derivatives Quarterly Review, Equity Derivatives Research, Goldman, Sachs & Co.

• Lauricella, Tom and Aaron Lucchetti. "What's Behind the Surge In the VIX 'Fear' Index?" Wall Street Journal (Oct 23, 2008) pg. C1.

• Lin, Yueh-Neng. "Pricing VIX Futures: Evidence From Integrated Physical And Risk-Neutral Probability Measures." Journal of Futures Markets (2007), vol. 27, no. 12, pp. 1175-1217.

• Moran, Matthew T. and Srikant Dash. "VIX Futures and Options: Pricing and Using Volatility Products to Manage Downside Risk and Improve Efficiency in Equity Portfolios." The Journal of Trading. (Summer 2007).

• Sepp, Artur. VIX Option Pricing in a Jump-Diffusion Model Risk Magazine, pp. 84-89, April 2008.

• Sulima, Cheryl. "Volatility and Variance Swaps" Capital Market News, Federal Reserve Bank of Chicago. (March 2001).

• Szado, Edward. “VIX Futures and Options: A Case Study of Portfolio Diversification During the 2008 Financial Crisis.” (Fall 2009) pp. 68 – 85.

• Tan, Kopin. "The ABCs of VIX." Barron's (Mar 15, 2004): p. MW16.
• Tracy, Tennille. "Index of Volatility Reflects Traders' Continued Caution." Wall Street Journal. (Oct 15, 2008) pg. C6.

• Tracy, Tennille. "Trading Soars on Financials As Volatility Index Hits Record." Wall Street Journal. (Sep 30, 2008) pg. C6.

• Whaley, Robert E., 1993, "Derivatives on Market Volatility: Hedging Tools Long Overdue," Journal of Derivatives 1 (Fall 1993), pp. 71—84.

• Whaley, Robert E. "Understanding the VIX." The Journal of Portfolio Management (Spring 2009).

References

1. ↑ CBOE Volatility Index (VIX) Options Q&A. Chicago Board Options Exchange.
2. ↑ Caution prevails, but volatility seen lower. Reuters.
3. ↑ "Can the VIX Signal Market Direction?". Credit Suisse.
4. ↑ "VIX as a Companion for Hedge Fund Portfolios". The Journal of Alternative Investments.
5. ↑ VIX Futures and Options Pricing and Using Volatility Products to Manage Downside Risk and Improve Efficiency in Equity Portfolios. Journal of Trading.
6. ↑ 30-Second Guide To Volatility Index (VIX). This Is Money.
7. ↑ CBOE Volatility Index (Vix) Futures Single-Day Volume Exceeds 100,000 Contracts for First Time. CBOE.
8. ↑ VIX Futures Open Interest Hits New Record: Over 280,000 Contracts. CBOE.
9. ↑ Trading in CBOE Volatility Index (VIX) Options and Futures Sets New Records Today. CBOE.
10. ↑ "Fear and Greed in Global Asset Allocation". The Journal of Investing.
11. ↑ VIX: Fact and Fiction, May 1, 2009. Chicago Board Options Exchange.
12. ↑ Faculty Profile, Robert E. Whaley. Vanderbilt Owen Graduate School of Management.
13. ↑ White Paper, CBOE Volatility Index. Chicago Board Options Exchange.