What is the VIX?
The VIX is a 30-day model-free implied volatility index computed from a strip of SPX options. It is a forward-looking proxy for the market's vol expectation — not the "fear index" the media calls it.
Definition
The VIX is a real-time index that summarises the implied volatility of SPX options over the next 30 calendar days. It is computed by a specific formula that aggregates the prices of a range of out-of-the-money SPX puts and calls, weighted by 1/K², to produce a number that approximates the expected variance over the next month. The result is annualised and quoted as a vol number (so VIX = 16 means the market is implying about 16% annualised vol over the next 30 days). VIX is not a "fear gauge" — it is the model-free fair strike of a 30-day variance swap, and it moves with implied vol, not directly with sentiment. It tends to spike when markets fall (because downside puts are typically expensive and they dominate the strip), but it can also rise on calm days if the surface re-prices.
Why it matters & how it's calculated
The VIX formula is essentially a static replication of a 30-day variance swap, with two near-month and next-month constant-maturity legs blended to produce a constant 30-day tenor. Critical points for a desk. First, the VIX is variance-based, not vol-based — small differences matter when you compare it to ATM IV (Jensen's inequality means VIX ≥ ATM IV always, equal only on a flat surface). Second, the VIX is computed on listed SPX options out to the wings, so wing prices materially drive it — a 0.05 lift in a far OTM put can move the VIX by a tick. This is exploited by mid-month settlement plays. Third, VIX futures and VIX options live on a different curve from the spot VIX — they price the expected future VIX at their own expiry, which is why "shorting VIX" via futures is structurally different from shorting SPX vol via strangles. The VIX itself is unhedgeable directly (you can't trade the index), only its derivatives are. Several "VIX of VIX" derivatives (VVIX, VXX, UVXY) exist on top of this stack, each with its own roll-yield and decay characteristics that have wiped out an unknowable number of retail accounts.
Worked example
On a typical morning, VIX prints 15. That tells you a 30-day SPX variance swap fair strike is approximately 15. ATM IV on 30-day SPX might be 13 — the spread (VIX − ATM) of 2 vol points reflects the wing-heavy contribution from puts in the VIX calculation. If equity falls 2%, VIX often jumps to 18-20: the put wings inflate, dragging VIX up faster than ATM IV moves.
Related concepts
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