VIX – haudoodeydudat?
Up until a few days ago, I had never heard of the Volatility Index, until it hit the headlines. It trades under the symbol VIX on the CBOE. This was one of those things I wish I had never asked about, but now I am fascinated by the answer.
In bull markets, it trades in the teens; for the past year, it has been in the 20’s. A couple of days ago, it hit a new record high: 80’s. So, it goes the opposite direction of equities. Today, I think, it is in the 50’s. From now, I am going to watch it along with other equities I am keeping tabs on.
My big question: how do they calculate it? The CBOE has a webpage and whitepaper devoted to it. I saw the formula: it looks complicated, but the arithmetic is straight-forward and easily programmed into Excel. I got lost when they described how they choose data points: I know nothing about options, so had no clue what they were choosing and why. It uses index options on the S&P 500: apparently, it has something to do with the gaps between strike prices. That led me to whitepapers on volatility swaps, variance swaps, and Black-Shoales-Merton; OK, now I have no idea what I am talking about (I am still not sure what vega is, other than a junky little car made by GM in the 70's that had an aluminum engine). I think I am going to just take it on faith as to what VIX represents.