Understanding the CBOE VIX Index


The Chicago Board Options Exchange Volatility Index, otherwise known as the VIX Index, is an expectation of near-term volatility in the S&P 500. The price of the VIX is derived from the prices of the put and call options on the S&P 500 index.

Essentially, the VIX Index provides an up-to-the-minute measure of how much the market thinks the S&P 500 is going to fluctuate, either up or down, over the next 30 days. 

Since the CBOE first launched the VIX index in 1993, it has not always been a tradeable instrument; it used to just be a measurement. Traders can now speculate and hedge by using the VIX Index. The CBOE created VIX futures in 2004 and later created VIX options in 2006.

Overall, the VIX Index is now widely regarded as the premiere gauge of fear and uncertainty in the largest stock market in the world. 

How is the VIX Index Calculated?

The current price of the VIX Index is calculated from the mid-point of S&P 500 option prices. The COBE uses both standard expiration SPX options and weekly expiration SPX options in their calculations. Standard SPX Options, also known as monthly options, expire on the third Friday of every month; weekly options expire on every other Friday. There are also quarterly and weekly SPX options that expire on days other than Friday, but these options are not used to calculate the VIX Index.

Every 15 seconds during regular market hours, the CBOE calculates the mid-price point of SPX options in between 23 days and 37 days until Friday expiration. These mid-point prices are then weighted to come up with the square of VIX, not VIX itself. Therefore, the calculation if the VIX is not linear, and this is one of the key reasons why it’s an impossible index to hold directly.

This is the official formula used by the CBOE to calculate the VIX:

Formula showing how the VIX Index is calculated


How Can You Trade the VIX?

There is no way to directly hold the VIX Index. Other indices, like the S&P 500, for example, are comprised of individual components, i.e. stocks. Although it’s not possible to purchase the S&P 500 through the ticker symbol SPX, because this is only for options, it is possible to purchase all 500 stock components, thereby purchasing the SPX index directly.

For the VIX Index, however, it is not realistic to purchase every single SPX option that is used to calculate the VIX’s price. The basket of SPX options that determine the price of the VIX change every minute as prices move up and down. It is therefore not feasible to constantly buy and sell the calls and puts accordingly to maintain up-to-date mid-point prices for all of the options used in the calculation.

Instruments to Trade the VIX

The most common ways of trading the VIX are through ETFs, ETPs, ETNs, futures, and options.

Buying or selling VIX futures, which trade on the CME, is the most direct way to gain exposure to the VIX Index besides trading VIX options. However, because the VIX is not innately tradable itself, VIX futures are priced based on their own set of metrics and price movement anticipations. This means VIX futures, which have the symbol VX, are theoretically not tied to the the VIX at all. It is very common for the VIX to be negative for the day and have VIX futures be positive, or vice versa.

Exchange-traded products, exchange-traded funds, and exchange-traded notes offer another way to trade the VIX. All of the volatility ETPs, ETFs, and ETNs track the VIX futures, not the VIX Index. This means a VIX ETN, like VXX, tracks the VIX futures, which only partially track the VIX Index. Because these exchange-traded instruments track VIX futures, they are subject to negative-roll and contango. As such, volatility ETPs should not be considered buy and hold investments.

In the short-term, volatility ETPs can rise dramatically, but the long-term performance is often negative, and the products will undergo reverse splits to stay above zero.

VIX options are another common way to trade the the VIX Index.

Volatility Alternatives

Since the VIX tracks the implied volatility of S&P 500 options, many traders apply directional volatility options strategies on the S&P 500 itself in lieu of trading VIX related instruments when trying to express an outlook on volatility.

Strategies like long or short strangles, straddles, calls and puts on the S&P have a high correlation to the VIX, since the VIX is a measure of the S&P 500 options, after all.

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