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VIX

A published index of the 30-day implied volatility of a broad US equity index, calculated from a strip of option prices rather than from any single option.

The construction is model free. Instead of backing a volatility out of Black-Scholes, the calculation takes the prices of a wide range of out-of-the-money puts and calls across two expirations, weights each by the inverse square of its strike, and combines them into a variance figure that is then annualised and interpolated to exactly 30 days.

Two consequences follow. First, VIX reflects the whole volatility-skew, not just at-the-money volatility, so heavy demand for far out-of-the-money puts lifts it even when nothing else changes. Second, VIX is a calculation, not an instrument — you cannot buy it, only derivatives on it.

Example: VIX at 18 means the option market is implying roughly an 18% annualised move over the next 30 days, or about 5.2% for the month. It does not forecast direction, and a reading of 18 is entirely compatible with a 10% crash.

Related: volatility-futures, vix-options, implied-volatility, skew-index

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

The volatility smile across strikesImplied volatility plotted against strike, dipping near the money and turning up at both ends, more steeply on the downside.Implied volatility32%28%24%20%8090110120Puts below the money cost moreFar calls cost more tooLowest IV near the moneyATM 100Strike price
The volatility smile. Options on the same stock and the same expiry are not priced off one volatility. Strikes near the money carry the lowest implied volatility, and it rises towards both ends — usually faster on the downside, which tilts the smile into a skew.

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