Specifications
IVX is an expected stock volatility over a future period. It is derived from current option prices and it is available for any optionable security
To calculate this index they use a proprietary weighting technique factoring the Delta and Vega of each option participating in its calculations. In total, 8 ATM options (4 calls and 4 puts) are used within each expiration to calculate the Call, Put and Mean Implied Volatility of each stock. This IV Index is normalized to fixed tenors (30, 60, 90, 120, 150, 180, 360, 720 days) using a linear interpolation by the variance (IV2t)
IVX and VIX have similar nature, despite some diversities in the methodology and calculation. VIX (introduced by CBOE in 2003) is counted as an option price's weighted average, using all available range of strikes, thus it is independent of the model used to derive implied volatilities. This technique works with a thick grid of actively traded strikes (i.e. S&P 500 and other indices), but not for the majority of optionable stocks. IVX allows calculating this measure for each individual stock, not just for the market in general.
Interpretation
IVX is calculated in the following way: (an example based on "IVX Call 30") suppose today is 04/05/2004, and there are 12 days till front month (April) expiry – and 47 days till next month expiry (May). Options with these two expiries will be used for IV Index calculation of term 30 – as they are 2 expiries closest to 30-day virtual expiration.
First, 4 April Call options contracts with strikes nearest to current stock price (spot) are selected – they are used to calculate IV Index for April. "IVX Call April" is their weighted average, where weighting is by Vega (option price sensitivity to a change in implied volatility). Some of these options, however, can be considered "bad" and filtered out of further calculations. For example, options with expiry less than 1 week from now are always discarded. The other check is that so-called put–call parity relation should not vary significantly. This means that implied volatility values of Call and Put option in the pair are sufficiently close. Briefly, the filtering algorithm tries to eliminate suspicious option contract to make sure that the resulting IV Index figure is relevant.
In the very same way, the IV Index for May expiry is calculated, "IVX May". Now, interpolation is performed between these two values to get "IVX Call 30"; interpolation is linear by variance, that is,
This particular interpolation is commonly used when dealing with volatilities.
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