The CBOE Volatility Index (VIX)
The CBOE Volatility Index, or VIX, is a real-time market index representing the market’s expectations for volatility.
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. The VIX attempts to measure the magnitude of price movements of the S&P 500 (i.e. its volatility). The more dramatic the price swings are in the index, the higher the level of volatility, and vice versa.
In general, volatility can be measured using two different methods.
The first method is based on historical volatility, using statistical calculations on previous prices over a specific time period. This process involves computing various statistical numbers, like mean (average), variance, and finally, the standard deviation on the historical price data sets.
The second method, which the VIX uses, involves inferring its value as implied by options prices. Options are derivative instruments whose price depends upon the probability of a particular stock’s current price moving enough to reach a particular level (called the strike price or exercise price).
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