Active traders, large institutional investors, and hedge fund managers use the VIX-linked securities for portfolio diversification , as historical data demonstrates a strong negative correlation of volatility to the stock market returns — that is, when stock returns go down, volatility rises and vice versa.
And often when left to our own devices, we don't do that. We let the winners run. They become an outsized portion of the portfolio. Other than the standard VIX index, Cboe also offers several other variants for measuring broad market volatility. Like all indexes, one cannot buy the VIX directly. Active traders who employ their own trading strategies as well as advanced algorithms use VIX values to price the derivatives which are based on high beta stocks.
Beta represents how much a particular stock price can move with respect to the move in a broader market index. Traders making bets through options of such high beta stocks utilize the VIX volatility values in appropriate proportion to correctly price their options trades. Accessed July 27, Technical Analysis Basic Education. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page.
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I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Part Of. Volatility Explained. Trading Volatility. Options and Volatility. Key Takeaways The Cboe Volatility Index, or VIX, is a real-time market index representing the market's expectations for volatility over the coming 30 days.
Investors use the VIX to measure the level of risk, fear, or stress in the market when making investment decisions. Traders can also trade the VIX using a variety of options and exchange-traded products, or use VIX values to price derivatives. Article Sources.
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. Miranda is completing her MBA and lives in Idaho, where she enjoys spending time with her son playing board games, travel and the outdoors.
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Thank You for your feedback! Something went wrong. Please try again later. Best Ofs. More from. By Kat Tretina Contributor. Any information may be inaccurate, incomplete, outdated or plain wrong. Macroption is not liable for any damages resulting from using the content. VIX Calculation Explained. VIX Calculation Step by Step Select the options to be included in VIX calculation — a range of call and put strikes in two consecutive expirations around the target day mark.
Sum up the contributions to get total variances of the first and second expiration. Calculate day variance by interpolating the two variances, depending on the time to expiration of each. Take the square root to get volatility as standard deviation. Multiply the volatility standard deviation by The result is the VIX index value.
The rest of this page explains individual steps in more detail. Strike Prices Included The set of options for each expiration includes both call and put options, but only at the money and out of the money strikes. Time to Expiration The time to expiration for a particular option is calculated very precisely in minutes. Getting day Variance from the Two Expirations The day variance is calculated by interpolating the total variances of the two expirations.
The two weights must add up to 1. Calculating the VIX from day Variance Having calculated the day variance, we need to take the square root to transform variance into standard deviation which is the traditional way how volatility is quoted and the VIX is no exception.
Only at-the-money options were included. Under the current method, a wide range of at-the-money and out-of-the-money strikes enters VIX calculation. The exact way how volatility was derived from option prices was different. The old method used an option pricing model, while the current method uses a direct formula.
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