
VIX 





Prices for 3 VIX Futures are above 
VIX Options FAQ
1. What is VIX?
The CBOE Volatility Index  more commonly referred to as "VIX"  is an uptotheminute
market estimate of expected volatility that is calculated by using realtime S&P 500^{®} Index (SPX) option bid/ask quotes.
VIX uses nearby and second nearby options with at least 8 days left to expiration
and then weights them to yield a constant, 30day measure of the expected volatility
of the S&P 500 Index.
2. How is VIX calculated?
calculation is independent of any theoretical pricing model, using a formula that
averages the weighted prices of atthemoney and outofthe money puts and calls
to derive expected volatility. More information and a sample calculation may be
found at the VIX White Paper.
3. How do VIX options allow me to trade volatility?
The VIX formula isolates expected volatility from other factors affecting option
prices, such as changes in underlying price, dividends, interest rates and time
to expiration. As such, VIX options offer a way for investors to buy and sell option
volatility simply and directly, without having to deal with the other risk factors
that would otherwise have an impact on the value of an SPX option position.
4. I'm used to options expiring on the third Friday of each month. Why do VIX options
expire on a Wednesday?
VIX was designed to be a consistent, 30day benchmark of expected market volatility,
as measured by SPX option prices. Of course, there is only one day in the life of
any option that is exactly 30 days to expiration, so in order to arrive at the 30day
standard, VIX is calculated as a weighted average of options expiring on two different
dates.
One day each month, on the Wednesday that is thirty days prior to the third Friday
of the following calendar month, the SPX options expiring in exactly 30 days account
for all of the weight in the VIX calculation. VIX options settle on these Wednesdays
in order to facilitate the special opening procedures that establish opening prices
for those SPX options used to calculate the exercise settlement value for VIX options.
5. Will VIX options always reflect current, realtime, VIX values?
Probably not, at least not until you get close to expiration. The underlying for
VIX options is the expected, or forward, value of VIX at expiration, rather than
the current, or "spot" VIX value. This forward value is estimated using the price
quotations of SPX options that will be used to calculate the exercise settlement
value for VIX on the expiration date, and not the options used to calculate spot
VIX. For example, VIX options expiring in May 2006 will be based on SPX options
expiring 30 days later  i.e.; June 2006 SPX series. In fact, June SPX options do
not even enter into the spot VIX calculation until April 17, 2006.
Some VIX options investors look at the prices of the
VIX futures to gain a better general idea of how the market is estimating
the forward value of VIX.
VIX option prices should reflect the forward value of VIX, which is typically not
as volatile as spot VIX. For instance, if spot VIX experienced a big up move, call
option prices might not increase as much as one would expect. Depending on the value
of forward VIX, call prices might not rise at all, or could even fall! As time passes,
the options used to calculate spot VIX gradually converge with the options used
to estimate forward VIX. Finally, at VIX options expiration, the SPX options used
to calculate VIX are the same as the SPX options used to calculate the exercise
settlement value for VIX options.
6. How is the exercise settlement value for VIX options calculated?
The exercise settlement value for VIX options (Ticker: VRO) is a Special Opening
Quotation (SOQ) of VIX calculated from the sequence of opening prices of the SPX
options used to calculate VIX at settlement. Most of the SPX option opening prices
typically reflect actual trades. The opening price for any series in which there
is no trade is deemed to be the midquote price, the average of that option's bid
and ask prices. Only series with nonzero bid prices upon completion of the special
SPX opening procedures are used in the SOQ calculation.
7. How is the calculation of the VIX SOQ different than the calculation of other
VIX values? What can this mean for VIX options settlement?
It is important to note that the VIX SOQ is the only VIX calculation that
uses traded prices. Every other reported VIX value uses midquote prices of SPX
option series. Typically, the theoretical VIX bid/ask spread (i.e., the difference
between VIX calculated using bid prices and VIX calculated using ask prices) is
0.8 to 1.2 VIX points. If the VIX SOQ is calculated using predominantly bid prices,
or predominantly ask prices, there may be a significant difference between the exercise
settlement value for VIX options and the reported VIX values (based on midquote
prices) on expiration day as well as at the close on the day before expiration.
8. Why do VIX option prices appear different than other index option prices I'm
used to seeing?
The price of any index option depends on the forward price of the index and the
expected shape of the forward price distribution. In the case of stock indexes like
the S&P 500, the theoretical forward price is determined in a fairly straightforward
manner that considers the "costofcarry" (i.e., interest rates and dividend yields).
Forward prices of option volatility exhibit a "term structure", meaning that the
prices of options expiring on different dates may imply different, albeit related,
volatility estimates. VIX option prices reflect the market's expectation of the
VIX level at expiration, as measured by the VIX SOQ on that date. For example, prices
for VIX options expiring in May 2006 reflect the expected volatility implied in
June 2006 SPX options; VIX options expiring in August 2006 reflect the expected
volatility implied in September 2006 SPX options, etc. The VIX volatility implied
by June SPX options may be significantly greater or lower than VIX volatility implied
by September SPX options.
Most readily available option pricing models assume that price changes in an underlying
asset  IBM or S&P 500 Index (SPX), for example  have a lognormal distribution.
The distribution of VIX prices is not lognormal. In a lognormal world, the price
of IBM, for instance, could go to $0 per share, or rise to very high levels depending
on market conditions and company fundamentals. A VIX value of zero, on the other
hand, would imply a market expectation of virtually no daily change in the
level of the S&P 500 Index! Extreme or persistently high VIX levels are just
as unlikely because there would need to be a market expectation of very large daily
SPX index changes over an extended period of time.
Option practitioners commonly refer to the unique behavior of VIX and other volatility
measures as "meanreverting," which is a statistical way of saying that at historically
low VIX levels, there is a higher probability that the next big move will be up
rather than down. Conversely, at historically high VIX levels, the next big move
is more likely to be down rather than up.
Because of these differences between VIX and traditional stock indexes, calculating
exact theoretical values for VIX options can be very complex. Assuming that VIX
option prices reflect the "term structure" and "mean reversion" characteristics
of VIX, VIX options could appear somewhat peculiar relative to other index and individual
stock options.
9. What is the "volatility of volatility"?
The expected volatility of VIX forward prices is another important factor influencing
VIX option prices. But what is the "volatility of volatility"? It turns out that
volatility, as measured by spot VIX values, is indeed very volatile. As shown in
the following table, the volatility of the VIX Index was higher than the volatility
of the S&P 500 Index (SPX), the Nasdaq100 Index (NDX) and the Russell 2000
Index (RUT), and several stocks, including Google, Apple and IBM.
NAME 
12/31/08 Price 
2008 Volatility 
VIX 
40.00 
127.3% 
VIX Near term Futures 
41.94 
88.9% 
SPX 
903.25 
41.0% 
RUT 
499.45 
46.4% 
NDX 
1,211.65 
42.3% 
GOOG 
307.65 
55.2% 
AAPL 
85.35 
58.2% 
GM 
3.20 
115.7% 
IBM 
84.16 
36.1% 
MSFT 
19.44 
48.5% 
C 
6.71 
116.8% 

NAME 
12/31/09 Price 
2009 Volatility 
VIX 
21.68 
88.9% 
VX Near Term Futures 
22.95 
69.2% 
SPX 
1,115.10 
27.3% 
RUT 
625.39 
36.2% 
NDX 
1,860.31 
26.5% 
GOOG 
619.98 
30.1% 
AAPL 
210.73 
33.7% 
GLD 
107.31 
20.8% 
IBM 
130.90 
27.5% 
MSFT 
30.48 
37.3% 
MS 
29.60 
79.0% 

NAME 
12/31/10 Price 
2010 Volatility 
VIX 
17.75 
115.7% 
VIX Near term Futures 
19.70 
74.9% 
SPX 
1257.64 
18.0% 
RUT 
783.65 
25.0% 
NDX 
2217.86 
19.5% 
GLD 
138.72 
16.5% 
GOOG 
593.97 
27.9% 
AAPL 
322.56 
26.7% 
GS 
168.16 
31.2% 
AMZN 
180.00 
32.7% 




Yet, there is another "volatility of volatility" to consider. The underlying for
VIX options, as noted earlier, is the group SPX of options that will be used to
calculate the exercise settlement value at expiration; that is, forward VIX. Historically,
forward VIX has tended to be less volatile, on average, than the VIX index itself.
In recent years, for example, the volatility of forward VIX (as measured by nearterm
VIX futures prices traded at the
CBOE Futures Exchange) was significantly less than the volatility of the
spot VIX.