what's going on everyone charlie here again we're going to talk about the vix the volatility index
specifically we're going to talk about sibo look into it it's history a little bit and some of the
other volatility indexes that exist so the sibo volatility index in 1993 the chicago board options
exchange otherwise known as sibo introduced the sibo volatility index otherwise known as the vix
which was originally designed to measure the market's expectation of 30-day volatility
implied by at the money s p 100 index option prices vixx soon became the premier benchmark
for u.s stock market volatility it is regularly featured in the wall street journal barons and
other leading financial publications as well as business news shows on cnbc bloomberg tv and cnn
slash money where vixx is often referred to as the fear index 10 years later in 2003 sibo together
with goldman sachs updated the vix to reflect a new way to measure expected volatility one that
continues to be widely used by financial theorists risk managers and volatility traders alike the
new vix is based on the s p 500 index the spx the core index for u.s equities and estimates expected
volatility by averaging the weighted prices of xps puts and calls over a wide range of strike prices
by supplying a script for replicating volatility exposure with a portfolio of xps options
this new methodology transformed vixx from an abstract concept
into a practical standard for trading and hedging volatility
volatility as a tradable asset on march 24th 2004 sibo introduced the furchex the first
exchange-traded vix futures contract on its new all-electronic sibo futures exchange cfe
two years later in february 2006 sibo launched vix options the most successful new product in
exchange history in less than five years the combined trading activity in the vix options and
futures has grown to more than 100 000 contracts per day the negative correlation of volatility
to a stock market return is well documented and suggests a diversification benefit to including
volatility in an investment portfolio vic's futures and options are designed to deliver pure
volatility exposure in a single efficient package sibo and the sibo futures exchange provides
a continuous liquid and transparent market for vix products that are available to all investors
from the smallest retail trader to the largest institutional money managers and hedge funds
beyond the vix in addition to vix sibo calculates several other volatility
indexes including the sibo nasdaq 100 volatility index or the vxn sibo djia
or the dow jones industrial average which is vxd you have the sibo russell 2000 which
obviously tracks the russell 2000 and you have the sibo s p 500 three month volatility index
or v x v currently vxd and rvx futures are listed on cfe rvx options trade on sibo
so the calculation if you are into math and you would like to calculate the the vix volatility
this is the formula stock indexes such as the s p 500 are calculated using the prices of the com
their component stocks each index employs rules that govern the selection of component securities
and a formula to calculate index values vix is a volatility index comprised of options rather than
stocks with the price of each option reflecting the market's expectation of future volatility
like conventional indexes vix employs rules for selecting component options
and a formula to calculate index values the generalized formula
used in the vix calculation is sigma squared equals 2 over time to expiration
um i'm going to go ahead and explain all these symbols to you so this is sigma is vix over 100
vix equals sigma times 100 so that's for the contracts t is time to expiration f is forward
index level derived from index option prices k 0 is first strike below the forward index level f
k i strike price of the i out of the money option a call if k i is greater than k zero
and to put if k is greater than k zero both put and call if k i equals k zero now k i
is the interval between strike prices half the difference between the strike on either side of k
now this triangle here is just delta that's your delta symbol and this is your sigma symbol now
note k for the lowest strike is simply the difference between the lowest strike and the
next tire strike likewise delta k for the highest strike is the difference between
the highest strike and the next lower strike r is your risk-free interest rate to expiration and q
is the midpoint of the bid-ask spread for each option with strike k1
so this is a sigma notation right here you have the upper limit last value of i so this
is your upper limit you have the formula for the terms right here the greek letter
sigma is this e right here and then the lower limit is right here so we can see right there
that's our lower limit delta symbols are your triangle here and this symbol right here
and then rational numbers are denoted as q
so getting started vix measures 30 day expected volatility of the s p 500 index the components of
vixen are near and next term put and call options usually in the first and second spx contract
months near-term options must have at least one week to expiration
a requirement intended to minimize pricing anomalies that might occur close to expiration
when there are near-term options or when the near-term options have less than a
week at expiration vix rolls to the second and third spx contract months for example on the
second friday in june vix would be calculated using spx options expiring in june and july
on the following monday july would replace june as the near term and august would replace july as the
next term in this hypothetical example the near term and near and next term options have 9 days
and 37 days to expiration respectively and reflect prices observed at the open of trading
8 30 am eastern or chicago time for the purpose of calculating time to expiration spx options
are deemed to expire at the open of trading on spx settlement day the third friday of the month
now the vix calculation measures time to expiration t in calendar days and divides
each day into minutes in order to replicate the precision that is commonly used by professional
option and volatility traders the net the timed expiration is given by the following expression
t equals m current day plus m settlement day plus m other days divided by minutes in a year
where m current day equals minutes remaining until midnight of the current day
and settlement day equals minutes from midnight until 8 30 a.m on sbx settlement day
and m other days equals total minutes in the days between current day and settlement day
using 8 30 am is the time of calculation t for near term and next term options
t1 and t2 respectively is t1 equals and they're just giving you a little example here
so basically the risk-free interest rate r is the bond equivalent yield of the ust bill maturing
closest to the expiration dates of relevant sbx options as such the vix calculation may use
different risk-free interest rates for near and next term options in this example however assume
that r equals 0.38 for both sets of options since many of the interim calculations are repetitive
only representative of samples appear below only representative samples appear below the complete
set of spx option data and calculations may be found in appendix one and i'll link this below
if you want to look more into it now supernote one right here says technically the expiration date
for the spx options is the saturday following the third friday of expiration month in this example
however expiration is deemed to take place at the determination of the exercise settlement value
of the spx which is based on the opening prices of svx component securities
all sibo volatility indexes are the vix the vxd the vxn the rvx the vxv the ovx the gvz
and the evz go check them out see what's going on that's the vix