Chapter 2

About the VIX Index

Officially known as the CBOE Volatility Index, the VIX is considered by many to be a gauge of fear and greed in the stock market. A more accurate description of what the VIX measures is the implied volatility that is being priced into S&P 500 index options. Through the use of a wide variety of option prices, the index offers an indication of 30-day implied volatility as priced by the S&P 500 index option market.

Before diving further into the calculation that results in the VIX, this chapter will cover the history of exactly how this index was developed followed by an overview of how the VIX is determined. Then for interested parties there is a more in-depth discussion of how the VIX is calculated. The VIX index has historically had an inverse relationship to performance of the S&P 500, and this often results in questions from traders who are new to the VIX. This relationship will be discussed in the context of put-call parity, which was mentioned in Chapter 1.

Finally, there are a handful of VIX-related indexes based on other equity-market indexes. The S&P 100–related VIX is still calculated using the old method to maintain some continuity for historical comparisons. Finally, there are also VIX indexes calculated on options based on the Nasdaq 100, Russell 2000, and Dow Jones Industrial Average, which are discussed toward the end of the chapter.

HISTORY OF THE VIX

The concept behind the VIX index was developed by Dr. Robert Whaley of Vanderbilt University ...

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