What is VIX, the Volatility Index?
VIX, created by the Chicago Board Options Exchange in 1993, is the Volatility Index. It measures the market’s expectation of near term volatility as reflected in the options prices of S&P 500 stock index. Implied volatility is an estimate of how much the price of a security is likely to move over a given period of time. VIX is constructed by using the Black-Scholes option pricing model to calculate implied volatilities for a number of stock index options. These are combined to create an overall measure of the market’s expectations for near term volatility. VIX was originally constructed using the S&P 100 index, but in 2004 CBOE switched to the S&P 500 to capture a broader segment of the overall market. To ensure continuity, the older calculation continues to be published under the name VXO. The Black-Scholes model assumes market movements can be expressed as a normally distributed probability function, better known as the bell curve. Visually, VIX is a measure of the height and width o
