Traders can then take that annualised number and perform some basic calculations to understand the expected move in the underlying index (in this case the S&P 500) over a defined period, such as a day or a week. In layman’s terms, if the VIX index is trading at 20 (%), the market is effectively pricing a 20% move higher or lower over the coming 12 months. What’s more, we know the market holds a 68.2% level of confidence that price will not exceed that degree of movement. To complicate matters somewhat, while the various S&P 500 options expiry equates to a rolling 30-day expiry, the quote you see is actually an expression of the expected percentage movement, higher or lower, in the S&P 500, from the current underlying price over the coming 12 months (or annualised). Where the level of the VIX index is derived from the pricing of S&P 500 options with expiry’s ranging between 23 and 37 days, and then weighted to create a rolling 30-day implied volatility. The VIX index is essentially a measure of the expected movement in the S&P 500 and like any options implied volatility, the VIX index is quoted as an annualised standard deviation percentage.
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