VIX’s 30-Day Horizon Versus Near-Expiry At-the-Money Implied Volatility
Summary
The document contrasts implied volatility from near-expiry, at-the-money S&P 500 options with the VIX. The response characterizes VIX as a discrete approximation to the square root of a theoretical fair variance swap strike, with its calculation window set around a 30-day horizon based on market liquidity. It also notes that volatility indices exist for other horizons. Thus, a near-term option and VIX summarize expectations over different periods, and their levels need not match.
A second response offers a calendar-based explanation for the stated gap: an unusually quiet few days may be priced alongside a month containing important economic releases and a central bank meeting. The discussion does not establish that near-expiry implied volatility reliably tracks realized volatility in every setting, nor does it provide a formal decomposition of the two measures. On dividends, it explains that option pricing uses the underlying’s dividend yield as part of cost of carry, regardless of whether the option itself is cash-settled.
Key ideas
- VIX reflects a roughly 30-day variance expectation, while near-expiry options cover a shorter horizon.
- Different volatility index horizons can be constructed for different market windows.
- Expected volatility can vary across a month when events are concentrated in particular dates.
- Dividend yield is a property of the underlying and affects option pricing through cost of carry.
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Full text
# implied volatility for close to expiry ATM options vs VIX # implied volatility for close to expiry ATM options vs VIX All throughout my MFE I was told that implied volatility for close to expiry ATM options is a reasonable estimate for current volatility and tracks realised vol pretty well. Then why does VIX measure 30-day expected volatility? Is VIX not supposed to be measuring current vol, but the average vol throughout the month? So is it correct to say: implied vol for the SPX options expiring in 3-4 days is currently sitting at ~6%, whilst the VIX is 13.5%. So currently vol is around 6%, but the average vol throughout the month might be around 13.5%? Bonus: If SPX options are cash-settled and don't pay dividends, does that mean their dividend yield is 0% wrt the Black-Sholes formula, or do you have to use the SPY dividend yield. ## Answer by AKdemy (score 2) https://quant.stackexchange.com/a/77453 Bonus: Dividend yield concerns the underlying, not the option. It is a cost of carry no arbitrage logic that is used to price options and as such you need to take dividends into account. The VIX index is basically the discrete analog of the square root of the theoretical fair variance swap strike. You can find details here. The calculation window was a choice made based on liquidity in the market. It is not the only index though. There is a 1d, 9D, 3m, 6m, 1y index. You can find them all here. ## Answer by dm63 (score 2) https://quant.stackexchange.com/a/77454 This question was asked the day before Thanksgiving ? Then an option that expires in 3-4 days is Friday ? Or Monday ? It doesn’t much matter, the point is that the market doesn’t expect much action in the next few days due to Thanksgiving holiday and the lack of data announcements. In contrast, over the next month we have payrolls, CPI and Fed meeting. Hence higher expected vol.
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