Chicago Board Options Exchange (CBOE) also known as the Cboe volatility index or vix was created or designed by the cboe global markets. VIX is a real-time market index that acts for the market expectation for upcoming 30-day volatility based on S&P 500 index options. VIX is calculated and broadcasts on a real-time basis by the cboe, which is also referred as the fear index or gauge.
Every portfolio manager, Investor, or research analyst looks to the VIX values to measure market risks, fear before taking any investment decisions.
How VIX works? stock market
VIX works by tracking the fundamental price of S&P 500 options. The VIX measures S&P 500 options, options contracts that take their price from S&P (Standard and poor’s) 500 known as a capital-weighted index of the 500 stocks in the US. stock market
VIX tries to measure the magnitude of the price that a financial instrument encounters over a period the more theatrically the price swings in the instrument, the higher the level of volatility. stock market
How Volatility is Measured stock market
It can be measured using two different factors. The first one is done by performing statistical calculations on the documented prices over a particular time period. The process includes computing different statistical numbers such as mean, variance, and finally the standard deviation on the documented price data sets. stock market
The second method of measuring volatility includes inferring its value as implied by the option prices. Options are derivative instruments whose price depends on the probability of the particular Stock’s current price moving almost to reach a particular level called the strike price or the exercise price. stock market
Although none of the above methods are perfect because both of them have their pros and cons and both of them give similar results for the volatility calculation, which lies in a close range. stock market
Calculation of VIX Index Values
VIX index values are calculated using the cboe traded-standard SPX option , which expires on every third Friday of a month and by using the weekly SPX options, which expire on all other Friday’s and SPX options whose expire period lies within 23 days and 37 days are considered. stock market
The formula is mathematically very complex, theoretically, it works like mentioned.VIX estimates the anticipated volatility of the S&P(Standard and poor’s) 500-index by aggregating the weighted cost of multiple SPX puts and calls over a wide range of strike prices. All such qualifying options should have valid non-zero bids and ask prices that show the market perception of which options’ strike prices will be hit by the fundamental stocks during the remaining time to the expiry. stock market