Understanding the VIX
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What they found
Whaley, who designed the original VIX for the CBOE, explains what the index measures and what it does not. The VIX is the market's expectation of 30-day S&P 500 volatility implied by option prices, dominated by the demand for index puts as portfolio insurance, which is why it rises when the market falls. He shows that the VIX and S&P 500 returns are strongly negatively correlated, that the relationship is asymmetric (VIX rises more on down days than it falls on up days), and warns that the VIX is a forward-looking price of insurance, not a forecast of realized volatility, and that it is not directly investable.
What you can use
- The VIX is the price of portfolio insurance: it spikes when people are scared and buying puts, not because volatility has been high.
- The VIX is not tradable directly; VIX futures and ETPs behave very differently from the spot index.
- Because implied volatility usually exceeds realized, the VIX systematically 'overpredicts' future volatility; that gap is the variance risk premium.
Caveats
Written by the index's creator for a practitioner audience; describes the pre-2010 methodology. Not a study of trading VIX products.
Tags: volatility, vix, implied-volatility, beginner-friendly
Summaries are our own reading of the paper, not the authors' words. Educational only, not advice. Discuss it in Book Club.