What is the Cboe Volatility Index® (VIX® Index®)?
The VIX Index is an up-to-the-minute market estimate of expected volatility that is calculated by using the midpoints of real-time S&P 500® Index (SPX) option bid/ask quotes. More specifically, the VIX Index is intended to provide an instantaneous measure of how much the market “thinks” the S&P 500 Index will fluctuate in the 30 days following each tick of the VIX Index. No one person or committee determines the level of the VIX Index. Rather, the VIX Index reflects an equilibrium price for risk as reflected in the prices of SPX options, which rise and fall based on the flow of orders from traders around the world.
In 1993, Cboe Global Markets, Inc. (f/k/a Cboe Holdings, Inc. (Cboe®) introduced the Cboe Volatility Index® (VIX® Index), which was originally designed to measure the market’s expectation of 30-day volatility implied by at-the-money S&P 100® Index (OEX® Index) option prices. The VIX Index soon became the premier benchmark for U.S. stock market volatility. It has been regularly featured in the Wall Street Journal, Barron’s and other leading financial publications, as well as on business news shows, where the VIX Index is often referred to as the “Fear Index.”
Ten years later in 2003, Cboe, with guidance from Goldman Sachs, reformulated the VIX Index to reflect a revised way to measure expected volatility, one that continues to be widely used by financial theorists, risk managers and volatility traders alike. Today’s VIX Index is based on the S&P 500 Index, the global proxy for the U.S. stock market, and estimates expected volatility directly from the weighted prices of SPX puts and calls covering a wide range of strike prices. The value of this SPX option portfolio is what the world recognizes as the VIX Index, but the portfolio itself supplies a script for replicating pure volatility exposure – an important innovation that has transformed the VIX Index from an abstract concept into a practical standard for trading and hedging volatility.