How Option Bids Affect the VIX Calculation

Summary

The document considers whether a market maker could influence the VIX by taking a position in VIX futures and then posting bids on out-of-the-money S&P 500 options. It describes a relevant feature of the calculation: options with positive bids are included, and option prices contribute to the index’s implied volatility. The answer frames the issue as one of measuring how much added bids would affect the calculated index.

The response says impact depends on the size and number of bids, and points out that the index gives greater weight to options nearer at-the-money than to more distant strikes. It also challenges the assumption that a live bid itself constitutes manipulation, suggesting that a trader who considers the bid unjustified could trade against it. This is a brief qualitative exchange, not a quantitative test or legal analysis; it gives no measured impact, specific scenario results, or detailed account of the index calculation.

Key ideas

• VIX calculation uses eligible option prices, including options with positive bids.
• Adding bids to out-of-the-money options could affect the index, but the size of the effect is not quantified.
• Options nearer at-the-money receive more weight than more distant strikes.
• The answer questions whether posting a live bid alone constitutes manipulation.
• The exchange offers qualitative observations rather than a tested estimate or legal conclusion.

Tags

# Manipulation of VIX


# Manipulation of VIX












Having finished my reading on CBOE's method of calculating the VIX on out of the money call and put options written on S&P 500,I have a thought about the ability of market making firms to manipulate the market. The calculation of VIX uses option prices with positive bid price, and each option contributes to the implied volatility as a whole. So, is it possible for a market-making firm to go long in VIX futures and immediately provide a bid price for out-of-the money options?

## Answer by Jared (score 1, accepted)

https://quant.stackexchange.com/a/38523

Definitely - but I would look to see how much that 1 additional bid price of `0.05` or more would impact the price of the index. Or, try doing it with 10-15 more bids (or however many). The index is weighted to at-the-money options much more, noting "Contribution by Strike":

I'm also a little uncertain how live bids are manipulating a market. If you think the bid is unwarranted, sell it! (Perhaps this is a little contentious - it reminds me of the DRW bid scandal. I was unsure of my opinion then, too.)

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