IVX

Last updated November 22, 2024

Lick five fingers Monitor IVX Monitor.png — Lick five fingers Monitor

IVX is a volatility index providing an intraday, VIX-like measure for any of US securities and exchange traded instruments. IVX is the abbreviation of Implied Volatility Index and is a popular measure of the implied volatility ^[1] of each individual stock.^[2] IVX represents the cost level of the options for a particular security and comparing to its historical levels one can see whether IVX is high or low and thus whether options are more expensive or cheaper. IVX values can be compared for the stocks within one industry to find names which significantly differ from what is observed in overall sector.

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 (IV^2t)

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,

${\text{IVX Call}}(30)={\frac {{\text{IVX Call April}}+({\sqrt {30}}-{\sqrt {12}})\ast ({\text{IVX Call May}}-{\text{IVX Call April}})}{{\sqrt {47}}-{\sqrt {12}}}}$

This particular interpolation is commonly used when dealing with volatilities.

History

Implied Volatility Index was introduced in 1998 and it is a registered trade mark of IVolatility.com.

1998 – Implied Volatility Index measure was introduced for 30 day term for US equity markets
2000 – Additional IV Index terms were added: 60, 90, 120, 150, 180, 360, 720
2002 – Coverage of IV Index is expanded to European Markets
2003 – Methodology revision: original time interpolation by square root of time is replaced with more accurate interpolation by variance.
2004 – Methodology revision: additional filtering by call-put parity is added
2005 – Coverage of IV Index is expanded to US future markets: index futures, agriculture, metals, FX, etc.
2006 – IV Index becomes available intra day for US equity markets
2007 – IV Index is registered under the trademark ‘IVX’
2008 – IVX becomes available intraday for US futures markets

Criticism

Although it is an excellent measure of averaged implied volatility of the stock, the IVX sometimes cannot be calculated for stocks with illiquid options that have no volume traded and a huge spread in prices. This is because none of the option models will produce good volatility measure using the options with unreliable prices.

Many commented in the past on availability of IVX only as an end-of-the-day measure; however, this changed in the last few years, and now IVX is available on an intraday basis.

Related Research Articles

The Black–Scholes or Black–Scholes–Merton model is a mathematical model for the dynamics of a financial market containing derivative investment instruments. From the parabolic partial differential equation in the model, known as the Black–Scholes equation, one can deduce the Black–Scholes formula, which gives a theoretical estimate of the price of European-style options and shows that the option has a unique price given the risk of the security and its expected return. The equation and model are named after economists Fischer Black and Myron Scholes. Robert C. Merton, who first wrote an academic paper on the subject, is sometimes also credited.

In mathematical finance, the Greeks are the quantities representing the sensitivity of the price of a derivative instrument such as an option to changes in one or more underlying parameters on which the value of an instrument or portfolio of financial instruments is dependent. The name is used because the most common of these sensitivities are denoted by Greek letters. Collectively these have also been called the risk sensitivities, risk measures or hedge parameters.

In financial mathematics, the implied volatility (IV) of an option contract is that value of the volatility of the underlying instrument which, when input in an option pricing model, will return a theoretical value equal to the price of the option. A non-option financial instrument that has embedded optionality, such as an interest rate cap, can also have an implied volatility. Implied volatility, a forward-looking and subjective measure, differs from historical volatility because the latter is calculated from known past returns of a security. To understand where implied volatility stands in terms of the underlying, implied volatility rank is used to understand its implied volatility from a one-year high and low IV.

In finance, moneyness is the relative position of the current price of an underlying asset with respect to the strike price of a derivative, most commonly a call option or a put option. Moneyness is firstly a three-fold classification:

A hedge is an investment position intended to offset potential losses or gains that may be incurred by a companion investment. A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insurance, forward contracts, swaps, options, gambles, many types of over-the-counter and derivative products, and futures contracts.

Volatility risk is the risk of an adverse change of price, due to changes in the volatility of a factor affecting that price. It usually applies to derivative instruments, and their portfolios, where the volatility of the underlying asset is a major influencer of option prices. It is also relevant to portfolios of basic assets, and to foreign currency trading.

Greed and fear refer to two opposing emotional states theorized as factors causing the unpredictability and volatility of the stock market, and irrational market behavior inconsistent with the efficient-market hypothesis. Greed and fear relate to an old Wall Street saying: "financial markets are driven by two powerful emotions – greed and fear."

In finance, the beta is a statistic that measures the expected increase or decrease of an individual stock price in proportion to movements of the stock market as a whole. Beta can be used to indicate the contribution of an individual asset to the market risk of a portfolio when it is added in small quantity. It refers to an asset's non-diversifiable risk, systematic risk, or market risk. Beta is not a measure of idiosyncratic risk.

Volatility smiles are implied volatility patterns that arise in pricing financial options. It is a parameter that is needed to be modified for the Black–Scholes formula to fit market prices. In particular for a given expiration, options whose strike price differs substantially from the underlying asset's price command higher prices than what is suggested by standard option pricing models. These options are said to be either deep in-the-money or out-of-the-money.

A variance swap is an over-the-counter financial derivative that allows one to speculate on or hedge risks associated with the magnitude of movement, i.e. volatility, of some underlying product, like an exchange rate, interest rate, or stock index.

The Standard and Poor's 100, or simply the S&P 100, is a stock market index of United States stocks maintained by Standard & Poor's.

The EURO STOXX 50 is a stock index of Eurozone stocks designed by STOXX, an index provider owned by Deutsche Börse Group. The index is composed of 50 stocks from 11 countries in the Eurozone.

In finance, correlation trading is a strategy in which the investor gets exposure to the average correlation of an index.

VIX is the ticker symbol and the popular name for the Chicago Board Options Exchange's CBOE Volatility Index, a popular measure of the stock market's expectation of volatility based on S&P 500 index options. It is calculated and disseminated on a real-time basis by the CBOE, and is often referred to as the fear index or fear gauge.

In finance, an option is a contract which conveys to its owner, the holder, the right, but not the obligation, to buy or sell a specific quantity of an underlying asset or instrument at a specified strike price on or before a specified date, depending on the style of the option.

In finance, a volatility swap is a forward contract on the future realised volatility of a given underlying asset. Volatility swaps allow investors to trade the volatility of an asset directly, much as they would trade a price index. Its payoff at expiration is equal to

In finance, the Heston model, named after Steven L. Heston, is a mathematical model that describes the evolution of the volatility of an underlying asset. It is a stochastic volatility model: such a model assumes that the volatility of the asset is not constant, nor even deterministic, but follows a random process.

<span class="mw-page-title-main">Volatility (finance)</span> Degree of variation of a trading price series over time

In finance, volatility is the degree of variation of a trading price series over time, usually measured by the standard deviation of logarithmic returns.

In finance, a stock index, or stock market index, is an index that measures the performance of a stock market, or of a subset of a stock market. It helps investors compare current stock price levels with past prices to calculate market performance.

The S&P/ASX200 VIX (A-VIX), is a financial market product, which is traded based on the implied volatility in the underlying Australian equity index.

References

↑ Levy, Adam. "What Is Implied Volatility (IV)? Definition, How to Use It". The Motley Fool. Retrieved 2024-11-21.
↑ "Charles Schwab". www.schwab.com. Retrieved 2024-11-21.

External links

Tatiana Lozovaia and Helen Hizhniakova "How To Extend Modern Portfolio Theory To Make Money From Trading Equity Options" (working paper)

This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.

[1] Levy, Adam. "What Is Implied Volatility (IV)? Definition, How to Use It". The Motley Fool. Retrieved 2024-11-21.

[2] "Charles Schwab". www.schwab.com. Retrieved 2024-11-21.

[1]

[2]

IVX

Contents