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Computerized Investing > Third Quarter 2010

CBOE’s Volatility Index (VIX)

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by CI Staff

Over the last couple of years, a great deal of attention has been paid to the Chicago Board Options Exchange (CBOE) Volatility Index, or VIX for short. The VIX is a measure of the implied or expected volatility of S&P 500 options over the next 30 days. Unlike historical volatility, which is the measure of the underlying market’s actual fluctuation over a defined period, implied volatility is the market’s estimated future volatility and is reflected in the premiums paid for options.

Originally launched in 1993, the VIX underwent a change in calculation in September 2003. The “original” VIX, which is still tracked under the ticker VXO, was calculated using at-the-money put and call options on the S&P 100 index (OEX). Furthermore, the original VIX was based on prices of only eight at-the-money OEX puts and calls, as these were the most actively traded index options at the time.

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Discussion

Kent R Johnson from CA posted over 4 years ago:

The VIX is intended to measure volatility of the underlying of an options trade. It is not intended to forecast highs or low's. An options trader is focused on volitility without focus upon the direction. Option traders can make money when the market goes up or down, thus Calls and Puts. Options traders are focused upon protecting a long position. Some stock investors use Puts like insurance to protect their position from a decline in hteir long position. Equity Option traders just want movement, up or down. Volitility reflects movement, thus the VIX.


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