VIX

VIX is the ticker symbol for the CBOE Volatility Index, a popular measure of the implied volatility of S&P 500 index options, calculated and published by the Chicago Board Options Exchange (CBOE). It is colloquially referred to as the fear index or the fear gauge.

The formulation of a volatility index, and financial instruments based on such an index, were developed by Menachem Brenner and Dan Galai in 1986 and described in two academic papers. The authors stated the "volatility index, to be named Sigma Index, would be updated frequently and used as the underlying asset for futures and options. ... A volatility index would play the same role as the market index play for options and futures on the index."

The VIX concept formulates a theoretical expectation of stock market volatility in the near future. The current VIX index value quotes the expected annualized change in the S&P 500 index over the next 30 days, as computed from the options-based theory and current options-market data.

The CBOE retained consultant Robert Whaley in 1992 to develop a tradable stock market volatility index based on index option prices. Since 1993, CBOE has published VIX real-time data. Based on the history of index option prices, Whaley then computed a data series of retrospective daily VIX levels from January 1986 onward.

The VIX is calculated and disseminated in real-time by the Chicago Board Options Exchange. Theoretically it is a weighted blend of prices for a range of options on the S&P 500 index. On March 26, 2004, the first-ever trading in futures on the VIX began on CBOE Futures Exchange (CFE). As of February 24, 2006, it became possible to trade VIX options contracts. Several exchange-traded funds seek to track its performance. The formula uses a -smoothed estimator that takes as inputs the current market prices for all out-of-the-money calls and puts for the front month and second month expirations. The goal is to estimate the implied volatility of the S&P 500 index over the next 30 days.

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