How the Pre-2014 VIX Used Monthly Options
Summary
The document outlines the historical VIX methodology and distinguishes two changes to the index. In 2003, the underlying shifted from S&P 100 options to S&P 500 options, and the calculation moved from implied volatility to a variance-swap approach. In 2014, weekly options were added. Before that addition, the calculation used the nearest eligible expiration with at least a week remaining and a second expiration without a stated upper time limit, then interpolated to a 30-calendar-day measure.
A separate description covers the older S&P 100 version: it selected nearby calls and puts around the index level, derived implied volatilities from option prices, averaged them, and interpolated across maturities. The question also asks why month-end expirations were excluded. The response says they were considered historically but offers liquidity as a possible reason, while noting that a quick quote check found month-end options comparable to nearby weekly options. That explanation is tentative, not a demonstrated finding, and the document does not provide a full formula or historical data analysis.
Key ideas
- The VIX methodology changed in 2003 and again in 2014, including changes to its underlying options and expiration selection.
- Before weekly options were included, the newer calculation required the nearest expiration to have at least a week remaining.
- The earlier S&P 100 method averaged option-implied volatilities and interpolated maturities to a 30-calendar-day horizon.
- Month-end options may have been omitted for liquidity reasons, but the document presents this as uncertain.
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Full text
# How was the old VIX calculated? # How was the old VIX calculated? Today VIX is computed based on near- and next- term options series which fall into the time period of [23, 37] days. That is what it is now, when they use SPX weekly, so they have options expiring every week. The question is, how was VIX calculated before 2014, when they used traditional SPX options only, expiring every month on the 3rd Friday? Could there be a situation when VIX was computed based on options with maturities of 1 and 31 days, for example? And why end-of-month series are ignored? ## Answer by onlyvix.blogspot.com (score 11, accepted) https://quant.stackexchange.com/a/25164 There were two changes to the VIX; the first change in 2003 that switched from S&P 100 options to S&P 500, and from implied volatility to variance swap method. The second change was in 2014 when calculation included weekly options. Before 2014 the first series used had to have at least one week to expiration. Then the next series was used without any limit on time to expiration. Month-end options were certainly considered, but are not used probably because historically they have been less liquid than regular 3rd Friday options. It is hard to say why CBOE did not include them when they included weeklys - I have not calculated statistics, but I just checked quotes, and bid-ask spreads, volumes, and open interest on month-end options appear comparable to nearest weekly options. Source: pre-2014 VIX white paper http://www.dormantrading.com/uploaded/docs/directory/vixwhite.pdf Alternative (reliable) link to white paper: https://web.archive.org/web/20091231021416/https://www.cboe.com/micro/vix/vixwhite.pdf ## Answer by vonjd (score 6) https://quant.stackexchange.com/a/25162 > The old VIX index is based on the Black-Scholes implied volatility of S&P 100 options. To construct the old VIX, two puts and two calls for strikes immediately above and below the current index are chosen. Near maturities (greater than eight days) and second nearby maturities are chosen to achieve a complete set of eight options. By inverting the Black-Scholes pricing formula using current market prices, an implied volatility is found for each of the eight options. These volatilities are then averaged, first the puts and the calls, then the high and low strikes. Finally, an interpolation between maturities is done to compute a 30 calendar day (22 trading day) implied volatility. Source: http://chesnes.com/docs/fed_docs/Hao_NewVix.pdf (see also Appendix within for the exact formulae) See also this exhaustive (and seminal) paper by Carr, P.; Wu, L.: A tale of two indices
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.