VIX Formula

(sigma)^2 = [2/T] * SUMMATION[[delta(Ki)]/[(Ki)^2]*e^rt*Q(Ki)] - 1/T*[F/Ko - 1]^2 sigma = VIX/100 VIX = sigma*100 Does anyone know how this VIX is really calculated in ‘English’ terms? I am trying to wrap my hands around this concept but in vain

Dinesh, what are you trying to do? Are you trying to understand what VIX is or you have to implement the formula for pricing purposes? Conceptually VIX is expected volatility over the next 30 days. It used to be calculated as average of implied volatilities of 2 closest to ATM call and 2 closest to ATM puts 30-day S&P options. Then the methodology changed to be model-independent. Now it includes a bunch of strikes, not just 4. Hopefully this context will be helpful. Of course, the paper on VIX will probably have explanation of the formula.

Thanks guys, I’ll take it from there.

I was told as general rule - If the VIX is at lets say 80 - the market is capable of an 8% move in either direction. So if it falls to 40 - the market is capable of moving 4% intraday and so on…

That general rule isn’t conceptually or mathematically correct.

VIX, as a technical indicator - is it correct to say that I can use it to predict the direction of the market in the near future. Say if the VIX is higher than the 10 day SMA, then the likelihood of the market to rally is almost always certain? Likewise if the VIX is lower than the 10 day SMA, then the likelihood of the market to poop is almost certain?

dinesh, you have to test that yourself.