Simple Question about VIX

Discussion in 'Options' started by Deviouz, Mar 23, 2009.

  1. Deviouz



    Just a short question. I have never really looked into the VIX to assist my trading, but have lately been interested in the historical data I might be able to get from it with relation to implied vols for indices, in particular the data dating back years from the VXO.

    However, just a brief look at the current VIX shows that it gives a higher value than its component first and second month implied volatilites.

    Does this make sense? If the VIX is meant to give a 30-day expected future volatility, than why would it be higher than the first month implied vol, I would expect it to be a weighted average of the 2 components, ie. a value between the first and second month implied vols. Am I missing something here?
  2. Deviouz


    Can ANYONE answer this question?
  3. nitro


  4. I'd love to reply, but don't know.

    I don't see how VIX can be higher than the front-month and 2nd month implied volatility - unless VIX uses many fewer option series in its calculation.

  5. First things first, there is no such thing as one “front month” or “second month” implied volatility. The slope of the SPX implied vol is a smirk with the out of the money puts being much higher. So you may have meant to say that the VIX is higher than the at-the-money implied volatility of the front two months which is correct because that is not how the VIX is calculated. Nitro already posted what you need to read, but if that is too much for you just look at the VIX as the theoretical implied vol of hypothetical 30 day options. Notice that it is theoretical, there is no currently traded option that you can point to and say that is the exact measure of the VIX. Because they take a sampling of options across the volatility curve the at-the-money options will normally have a lower implied vol than the calculated VIX level.
  6. Deviouz


    Ok, thankyou.

    A supervisor of mine eventually told me the same thing. Funny thing is I asked a couple of the guys on my desk the same thing and they couldn't even tell me, that's why I just thought I'd ask it on here. I've been working in options for a while and I didn't know this, so you learn something every day I guess.

    So is the VIX really a 'better' predictor of future volatility than the at-the-money volatility, or is it just another number? I must admit I have never really thought the question through, the absolute values of volatility have never really meant that much to me.
  7. I always keep an eye on the VIX index (not the futures). It is one of the most important dimensions of option trading. As far as predicting the future, forget it. The VIX has trended down many times, and in one day, wipes out that nice trend. I like to look at relative levels. Obviously, when the VIX was at 80, it was an option seller's dream. When the VIX drop to 40, it is still a pretty good relative value for option sellers. Option seller's nightmare is when the VIX goes from 40 to 80 [or from 10 to 20 to 40]--which can happen at the drop of a hat. Just my $.02.
  8. dennisb


    the document, posted earlier, states "this
    new methodology transformed VIX from an abstract concept into a practical standard for
    trading and hedging volatility." Anyone had success with hedging volatility on index future-options with vix futures?
  9. One thing people dont understand about the vix is how skew is involved. I gave a VERY brief display of how it works on my blog. If you have more interest I can cover it more deeply. But, for how short it is, I think it shows how the VIX can fool people into thinking VOL is down or up.

  10. Volare


    The last statement is incorrect. Following maybe a bit too much for this forum but it should send people in the right direction.

    By construction VIX is the market expectation of VARIANCE realized over say the next 30 days. There are tons of articles that explain how a portfolio of options - i.e. options used in VIX construction - is the same as going long variance. VIX quotes are simply taking the square root of this number. VIX is not some weighting of implieds. The old VIX (now under the VXO ticker) was that.

    The ATM implied vol, on the other hand, is a market expectation of realized VOLATILITY. If vol is random, then square root of expectation of variance will always be greater than expectation of volatility. That's why VIX is greater than ATM vol. This is a mathematical reality and not due to some "sampling across the vol curve."
    #10     Jun 10, 2009