Specifications
The VIX is calculated and disseminated in real-time by the Chicago Board Options Exchange. Theoretically it is a weighted blend of prices for a range of options on the S&P 500 index. On March 26, 2004, the first-ever trading in futures on the VIX began on CBOE Futures Exchange (CFE). As of February 24, 2006, it became possible to trade VIX options contracts. Several exchange-traded funds seek to track its performance. The formula uses a kernel-smoothed estimator that takes as inputs the current market prices for all out-of-the-money calls and puts for the front month and second month expirations. The goal is to estimate the implied volatility of the S&P 500 index over the next 30 days.
The VIX is calculated as the square root of the par variance swap rate for a 30 day term initiated today. Note that the VIX is the volatility of a variance swap and not that of a volatility swap (volatility being the square root of variance, or standard deviation). A variance swap can be perfectly statically replicated through vanilla puts and calls whereas a volatility swap requires dynamic hedging. The VIX is the square-root of the risk neutral expectation of the S&P 500 variance over the next 30 calendar days. The VIX is quoted as an annualized standard deviation.
The VIX has replaced the older VXO as the preferred volatility index used by the media. VXO was a measure of implied volatility calculated using 30-day S&P 100 index at-the-money options.
Read more about this topic: Vix