Fortunately, the calculation is performed by the CBOE exchange, so the trader doesnât have to perform complex mathematical calculations to derive volatility levels manually. The CBOE provides the following formula as a general example of how the VIX is calculated: σ2=2T∑iΔKiKi2eRTQ(Ki)−1T[FK0−1]2\sigma^2 = \frac{2}{T}\sum_i \frac{\Delta K_i}{K_i^2}e^{RT} Q(K_i) - \frac{1}{T}\left [\frac{F}{K_0} - 1\right]^2σ2=T2∑iKi2ΔKieRTQ(Ki)−T1[K0F−1]2. Therefore, two different interest rates may be used for the two different expirations which enter VIX calculation. This rollover happens every week. It is calculated in real-time based on the live prices of S&P 500 index. It is calculated and disseminated on a real-time basis by the CBOE, and is often referred to as the fear index or fear gauge. The VIX is calculated using a "formula to derive expected volatility by averaging the weighted prices of out-of-the-money puts and calls.” Using options that expire in 16 and 44 days, respectively, in the example below, and starting on the far left of the formula, the symbol on the left of “=” represents the number that results from the calculation of the square root of the sum of all the numbers that sit to the right multiplied by 100. The Cboe Volatility Index, or VIX, is an index created by Cboe Global Markets, which shows the market's expectation of 30-day volatility. [Episode 580] Option Alpha. This was to eliminate options in the last days before expiration, whose prices sometimes behave in strange ways. Forward rate agreements (FRA) are over-the-counter contracts between parties that determine the rate of interest to be paid on an agreed upon date in the future. More specifically, the VIX is calculated by looking at the midpoints of real-time S&P 500 option bid and ask prices. Volatility ETF options include the ProShares Ultra VIX Short-Term Futures (UVXY) and ProShares VIX Mid-Term Futures (VIXM). The old version of the VIX using monthly options only is still being calculated and available under the symbol VIXMO. It takes less than a minute. These include hedge funds, professional money managers and individuals that make investments seeking to profit from market volatility. Thanks to the Internet, you can go online, type in the ticker VIX and get the number delivered to your screen in an instant. VVIX is the VIX of VIX. As soon as the near-term options get less than 24 days to expiration, they are no longer used. So we will use the 2745 and 2750 options, Let's denote them K1 = 2745 and K2 = 2750 The most difficult part is gathering all the information to be plugged into the formula. This page explains the logic of VIX calculation and some of the underlying assumptions and parameters. Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. How is the VIX calculated? The VIX is expressed as an annualized volatility measure. The VVIX index is calculated using exactly the same logic as the VIX index. The VIX Index estimates expected volatility by aggregating the weighted prices of S&P 500 Index (SPX SM) puts and calls over a wide range of strike prices. Instead, there is a formula which directly derives variance from prices of different options with the same time to expiration. Basic Logic of VIX Calculation. The rule was two nearest monthly expirations with at least one week left to expiration. The result is then multiplied by the result of the difference between the number of minutes to expiration of the next term option (61,920) minus the number of minutes in 30 days (43,200). VIX options track the VIX in a time variable fashion. 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