Thursday, May 20, 2010

The Vix

So i've been wondering for awhile now how exactly the Vix (a index that is meant to reflect volatility in the stock market) works. looked it up on wikipedia today and figured it was something interesting to post on the blog. Its based on a weighted average the prices of 30 day put and call options for stocks in the S&P500. This makes intuative sense since higher volatility (ie change in price) means a futures option will be more like to be in the money. For example a call option with a strike price of 100 and a current price of 80 will be more valuable the ,more the market expects the price to increase by the expiration date. Thus a high option prices = high implied volatility = high vix. Or that's my understanding. and just to sound smarter ill thow in "black-scholes...blah blah blah".

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