Question

What does VIX represent and how its real-time market value shown to investors every second is calculated?

Answer 1

VIX represents CBOE Volatility Index. It represents the market expectation of 30 day forward volatility. Thus it measures market risk and expectations.

It is calculated by averaging the weighted prices of out of money puts and calls. It uses the time of expiration in minutes of the nearest term option divided by the number of minutes in a year. The result is multiplied by the volatility of the option. This is multiplied by (Minutes to expiration of the next term option - minutes in 30 days ). This is now divided by (Minutes to expiration of the next term option - Minutes to expiration of the near term option). Repeat the process for other option.

Take sum of the above. Multiply with Minutes in a 365-day year/ Minutes in 30 days. Take square root and multiply by 100. This is the VIX.