How Is the VIX Calculated?

by Diane Perez

The Chicago Board of Exchange (CBOE) posts several volatility indices, one of which is VIX. While traditional indices measure the volatility of stocks, VIX follows the price of options as an indication of future volatility levels. VIX provides an expectation of the volatility of the S&P 500 over the next 30 days. VIX is one source of information that investors use when deciding whether to buy or sell their holdings.

Volatility

CBOE publishes two charts tracking market volatility. One lists the dates when the stock market changed more than 6.5 percent in either direction. The other chart lists dates when volatility was greater than 35 percent. The stock market updates VIX every minute until the closing bell.

Options

Stockbrokers divide options into near-term and next-term. Near-term options have expiration dates of at least eight days. Next-term options have expiration dates of 30 to 60 days. An option can be a put or a call. A put is a bid to sell a financial security to another investor at a selected price. Stockbrokers place puts when stocks are falling in price. A call is asking to buy a financial security at a selected price from another investor. Calls increase in value as the price of a particular security increases. An investor earns a profit when he can buy stock for less than the price of the open market, or sell at a higher price. The danger of trading in options is that you can lose your investment if you do not trade before the expiration date.

Calculating VIX

A computer program monitors the price changes of a group of options, and then assigns a volatility index number reflecting that level of change. The number of options used when calculating VIX varies with the level of volatility, with the number increasing as volatility increases. Only options with an expiration of eight days or longer are included in VIX. The calculation is mathematically complex with many variables. CBOE’s computer does the calculations, not individual analysts.

VIX Score

VIX increases as the stock market declines. It does not increase as much when there is an upward swing in the market. This is due to the belief that an upward trend is not as dangerous as a downward trend. A VIX score of 10 to 22 is within the normal range, predicting less than 6.5 percent fluctuation during the next 30 days. A score above 22 is considered vvolatile. VIX goes up to a score of 100, which estimates market volatility of 28.87 percent over 30 days.

About the Author

Diane Perez is a writer who contributes to various websites, specializing in gardening and business topics, and creates sales copy for private clients. Perez holds a Bachelor of Science in education from the University of Miami.

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