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What is the CBOE Volatility Index (VIX)?

By Mensholong Lepcha

Reviewed by Vanessa Kintu

Fact checked by Richard Reed

Chicago Board Options Exchange (CBOE) VIX of VIX (VVIX)

Chicago Board Options Exchange (CBOE) VIX of VIX Index, also known as CBOE VVIX index, is the measure of stockmarket volatility indicated by the CBOE Volatility Index.

In order to understand better what VVIX index means we need to learn about the CBOE Volatility Index.

The Chicago Board Options Exchange Volatility index (VIX) is a real-time index that measures the expectation of future volatility for the US equity market over the coming 30 days. Volatility is the frequency and magnitude of price movement of a financial instrument. 

The VIX index is based on the S&P 500 index, which is one of the three benchmark indices for the US stockmarket. VIX measures expected future volatility of US equity markets by calculating the weighted prices of S&P 500 index call and put options over a wide range of strike prices.

The VIX Index was introduced by CBOE Global Markets in 1993 and was originally designed to measure 30-day market volatility expectations by tracking at-the-money S&P 100 index option prices. In 2003, the VIX index was updated to be based on the S&P 500 index.

How does VIX work?

The VIX index is seen as a gauge of investor sentiment and market uncertainty. The index is commonly referred to as the ‘Fear index’. Higher values on the VIX indicates greater levels of fear and uncertainty in the market.

CBOE offers VIX index futures and options trading, which is used by investors as an actively-traded risk-management tool. 

“The negative correlation of volatility to stockmarket returns is well documented and suggests a diversification benefit to including volatility in an investment portfolio,” said CBOE.

Since the VIX index is inversely correlated to the S&P 500 index, VIX futures and options are used by investors to hedge their equity portfolios against market declines. Traders can buy and sell VIX futures and options to express their bullish, bearish or neutral market sentiment.

Traders also use VIX futures and options for implementing arbitrage strategies to generate returns from expected and realised market volatility. “Over long periods, index options have tended to price in slightly more uncertainty than the market ultimately realises,” said CBOE.

VIX index options can be traded for nearly 24 hours a day, five days a week, according to the CBOE website. 

VVIX index: Calculation of VIX options

This brings us back to the CBOE VIX of VIX Index (VVIX). The VVIX index measures the expected volatility of the VIX index. The method of calculation is the same as the one used to calculate VIX values from S&P 500 index options. Here, the VVIX values are derived from VIX options.

Investors trading VIX options can look at the VVIX index to get an idea on expected volatilities that could drive prices of VIX options. The VVIX index is also seen as an indicator of stockmarket confidence.

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