Why is the CBOE making changes to the VIX?
CBOE is changing VIX to provide a more precise and robust measure of expected market volatility and to create a viable underlying index for tradable volatility products. The New VIX calculation reflects the way financial theorists, risk managers and volatility traders think about – and trade – volatility. As such, the New VIX calculation more closely conforms to industry practice than the original VIX methodology. It is simpler, yet it yields a more robust measure of expected volatility. The New VIX is more robust because it pools information from option prices over a wide range of strike prices thereby capturing the whole volatility skew, rather than just the volatility implied by at the money options. The New VIX is simpler because it uses a formula that derives the market expectation of volatility directly from index option prices rather than an algorithm that involves backing implied volatilities out of an option-pricing model. The changes also increase the practical appeal of VIX.
