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5:00Volatility as an Asset: the VIX and How Short-Vol Blew Up in 2018
The VIX is not a price you can buy, it is the square root of the market’s expected variance. On 5 February 2018 a crowded bet that it would stay calm vaporised $3bn of funds in a single afternoon.
Volatility is a tradeable asset, not just a statistic. The Cboe VIX measures the market’s 30-day expected volatility of the S&P 500, expressed as an annualised standard deviation. Crucially it is forward-looking and risk-neutral: it is extracted from the prices of a wide strip of out-of-the-money SPX puts and calls, not from past returns. The VIX is the fair strike of a variance swap on the S&P 500, capped only by the finite range of listed strikes and by jump risk.
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