VIX

The VIX is the Cboe Volatility Index. It measures the 30-day expected volatility of the S&P 500 implied by SPX option prices, and it is quoted in volatility points: a VIX of 16 corresponds to an annualised 16%. It is an index, not a tradable asset. Exposure goes through VIX futures and options.

How it works

Cboe computes the VIX from a wide strip of out-of-the-money SPX puts and calls on the two expiries that bracket 30 days, then interpolates to a constant 30-day horizon. The formula is model-free: it prices the fair strike of a 30-day variance swap and takes the square root, rather than averaging Black-Scholes implied vols. VIX futures trade on Cboe Futures Exchange with a multiplier of $1,000 per index point. They settle in cash on a Special Opening Quotation computed from opening SPX option prices on the Wednesday 30 days before the standard SPX expiry of the following month.

Example

Hypothetical: with the VIX at 16, the implied one-month standard deviation of the S&P 500 is about 16% / √12, roughly 4.6%. A trader who buys one VIX future at 18.00 and sells it at 19.50 makes 1.50 × $1,000 = $1,500.

On the desk

VIX futures do not track spot VIX day to day. Each contract prices the expected VIX at its own expiry, so a long futures position can lose money even when spot VIX rises, if the curve was in steep contango.