Saturday, February 14, 2009

More VIX

Here are 10 things everyone should know about the VIX from VixandMore.blogspot.com. NOTE: This should not be confused with the VIG. Here is a link to the Chicago Board of Exchange White paper on the VIX

From the White Paper
The most significant change is a new method of calculation. The new VIX estimates expected volatility from the prices of stock index options in a wide range of strike prices, not just at-the-money strikes as in the original VIX. Also, the new VIX is not calculated from the Black Scholes option pricing model; the calculation is independent of any model. The new VIX uses a newly developed formula to derive expected volatility by averaging the weighted prices of out-of-the money puts and calls. This simple and powerful derivation is based on theoretical results that have spurred the growth of a new market where risk managers and hedge funds can trade volatility, and market makers can hedge volatility trades with listed options.

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