how does the cboe volatility index vix work 
the vix attempts to measure the magnitude of price movements of the s p 500 i e its volatility the more dramatic the price swings are in the index the higher the level of volatility and vice versa in addition to being an index to measure volatility traders can also trade vix futures options and etfs to hedge or speculate on volatility changes in the index in general volatility can be measured using two different methods the first method is based on historical volatility using statistical calculations on previous prices over a specific time period this process involves computing various statistical numbers like mean average variance and finally the standard deviation on the historical price data sets the second method which the vix uses involves inferring its value as implied by options prices 1 options are derivative instruments whose price depends upon the probability of a particular stock s current price moving enough to reach a particular level called the strike price or exercise price since the possibility of such price moves happening within the given time frame is represented by the volatility factor various option pricing methods like the black scholes model include volatility as an integral input parameter since option prices are available in the open market they can be used to derive the volatility of the underlying security such volatility as implied by or inferred from market prices is called forward looking implied volatility iv extending volatility to market levelthe vix was the first benchmark index introduced by ccoe to measure the market s expectation of future volatility being a forward looking index it is constructed using the implied volatilities on s p 500 index options and represents the market s expectation of 30 day future volatility of the s p 500 index which is considered the leading indicator of the broad u s stock market 1introduced in 1993 the vix is now an established and globally recognized gauge of u s equity market volatility it is calculated in real time based on the live prices of the s p 500 index calculations are performed and values are relayed from 3 a m to 9 15 a m and from 9 30 a m to 4 15 p m est cboe began the dissemination of the vix outside of u s trading hours in april 2016 2calculation of vix valuesvix values are calculated using the cboe traded standard spx options which expire on the third friday of each month and the weekly spx options which expire on all other fridays only spx options are considered whose expiry period lies within more than 23 days and less than 37 days 3while the formula is mathematically complex it theoretically works as follows it estimates the expected volatility of the s p 500 index by aggregating the weighted prices of multiple spx puts and calls over a wide range of strike prices 4 all such qualifying options should have valid nonzero bid and ask prices that represent the market perception of which options strike prices will be hit by the underlying stocks during the remaining time to expiry for detailed calculations with an example one can refer to the section the vix index calculation step by step of the vix white paper during its origin in 1993 vix was calculated as a weighted measure of the implied volatility of eight s p 100 at the money put and call options when the derivatives market had limited activity and was in its growing stages 5as the derivatives markets matured 10 years later in 2003 the cboe teamed up with goldman sachs and updated the methodology to calculate vix differently it then started using a wider set of options based on the broader s p 500 index an expansion that allows for a more accurate view of investors expectations of future market volatility a methodology was adopted that remains in effect and is also used for calculating various other variants of the volatility index 2volatility value investors fear and vix values all move up when the market is falling the reverse is true when the market advances the index values fear and volatility decline the price action of the s p 500 and the vix often shows inverse price action when the s p falls sharply the vix rises and vice versa as a rule of thumb vix values greater than 30 are generally linked to large volatility resulting from increased uncertainty risk and investors fear vix values below 20 generally correspond to stable stress free periods in the markets 