Measuring movement

The VIX calculation measures 30-day expected volatility of the S&P 500 index. The components are put and call options with more than 23 days and less than 37 until expiration. 

It’s calculated as 100 times the square root of the expected 30-day variance of the S&P 500 rate of return, according to the CBOE’s VIX Primer. The 30-day variance is calculated as the sum of squared standard deviations, or volatilities, of the S&P 500 rate of return at given points of time during the 30 days. 

To understand the complex calculation in what Henrich calls a “light-math way,” you have to comprehend that the VIX is made up of the weighted average of the implied volatilities of strips, comprised of eight values of out-of-the-money puts, and eight out-of-the-money calls. Each put or call on a strip has a different implied volatility value, and the differentiation between them is called the skew. 

“The skew is a real beast, because it can move an enormous amount for no reason at all,” Henrich says. “It’s a matter of perception, of supply and demand.”  

Everyone trading has a different concept of skew, and if a trader is long or short on predicted skew, that can mean differences of millions of dollars. This, according to Henrich, is what makes the VIX so complex, particularly because some of the largest players in the game aren’t traders: they’re banks and corporations; and they’re not all in the same time zone. 

In 2013, the CBOE opened a London hub, and extended trading in VIX options and futures to 23 hours a day. 

“VIX futures are available 24/5,” Caauwe says. “We finished 2014 with 8.6% of our regular daily volume outside of U.S. trading hours.” 

This global reach enhanced the immense popularity of the VIX, futures on which have seen five straight years of record growth (see “Liquid vol,” below).