Everything so far has been single stocks and one ETF. Index options are a slightly different animal, and the VIX, which every news channel quotes, is built from them. If you can read the VIX as a volatility number rather than a fear number, you can compare it with any IV on your screen in one step.
Index options are not stock options
Options on the S&P 500 index itself, ticker SPX, differ from options on the SPY ETF in three ways that matter.
- Cash settled. There are no shares to deliver. At expiration an in-the-money SPX option pays the difference between the index level and the strike in cash. Nobody is assigned 500 stocks.
- European. They can only be exercised at expiration, never early. That removes the early-exercise questions from earlier in the course. An SPX put is never exercised early to collect the interest, because it cannot be.
- Priced off the forward. With no early exercise and no dividend to capture, the whole chain is priced against the index forward for that expiration: the spot level plus interest, minus the dividends the index pays before expiry. In the Terminal's chain data the underlying price shown for an index expiration is that forward, so a 30-day SPX forward sits roughly 10 to 15 points above the cash index, and more the further out the expiration. On a stock chain the same field is close enough to spot to ignore. On an index it is not.
SPY options are American, physically settled and about one tenth the size of SPX. For learning, SPY is the better lens, because everything you learned on stock chains applies without adjustment.
The VIX is an implied volatility
The VIX is the 30-day implied volatility of the S&P 500, worked out from the prices of SPX options across a wide range of strikes, and quoted in the same units as every IV on your screen: annualized percent, called vol points. A VIX of 17 means the options market is pricing an annualized volatility of about 17% for the index over the next 30 days.
Annualized is the part people trip on. Seventeen percent is not the move the market expects this month; it is the pace, scaled up to a year. To bring it back to a month, multiply by the square root of the fraction of a year: 30 days is about a twelfth of a year, the square root of a twelfth is about 0.29, and 17 times 0.29 is about 4.9%. So VIX 17 says that over the next 30 days the S&P 500 finishes within about 4.9% of where it started roughly two times in three, and within about 9.8% roughly 19 times in 20.
The range of outcomes 30 days out for a $100 index priced at 17% volatility: the darker band is one standard deviation, about 4.9% either way. Drag volatility to 32 to see a stressed market's range, or days down to 1 to see a single day's.
On a $100 stand-in for the index, that is a one-standard-deviation range of about $95 to $105 a month out. Real index returns have fatter tails than this bell curve, so the far outcomes happen more often than it suggests, which is exactly why the market charges extra for the puts out there.
From the VIX to a daily move
To turn the VIX into a daily number, divide by the square root of the number of trading days in a year, 252, which is about 15.9. So 17 divided by 15.9 is roughly 1.07%: a VIX of 17 says a typical day in the S&P 500 is about a 1% move. VIX 32 says about 2%. That is the whole trick. The VIX is not a fear index, it is an implied daily move with the arithmetic left out.
| VIX | Typical daily move |
|---|---|
| 12 | about 0.75% |
| 17 | about 1.07% |
| 25 | about 1.6% |
| 40 | about 2.5% |
The VIX has a term structure too
The VIX is one point, 30 days out, on the S&P 500's term structure. In calm markets the curve slopes up: short-dated vol sits below long-dated vol, because the market charges more for more unknown time. In a selloff the front jumps first and the curve inverts. That is why the VIX can double in a week while one-year index vol moves only a few points.
At-the-money implied vol for the index against days to expiry. A calm market slopes up from a low front. Drag front-month volatility to 35 and the curve inverts, the shape of a selloff: short-dated vol leaps while long-dated vol barely moves.
VIX versus SPY's own IV
Because the VIX is a 30-day IV on the S&P 500, it should sit close to SPY's own 30-day implied volatility. They are not identical. The VIX is built from a strip of strikes that includes the far out-of-the-money puts, where the skew lifts IV, so it usually prints above SPY's at-the-money 30-day IV, and by several points when the skew is steep. Comparing the two is the quick sanity check on any day: the wider the gap, the more the market is paying for the tail rather than the middle.
The more important comparison is with realized. Put the VIX, SPY's 30-day IV and SPY's 20-day realized volatility side by side and you have the index version of the volatility risk premium: implied usually runs above realized, and the size of that gap is the price of index insurance right now. When the gap closes or turns negative, the market is moving more than the options expected, and that is when hedges are cheap relative to what the tape is doing.
The maths: how the VIX is built, and the daily move rule
The VIX is not read off one option. It is the square root of the 30-day variance implied by a whole strip of out-of-the-money SPX puts and calls. The idea: a portfolio of options across every strike, each weighted by one over its strike squared, pays off in proportion to the variance the index actually delivers, whichever way it moves. The price of that portfolio is therefore the market's price for variance. Take the square root, express it annualized in percent, and you have the VIX. Two expirations either side of 30 days are blended to land on exactly 30. Because the out-of-the-money puts carry the skew, their extra premium feeds straight into the number.
The daily rule comes from volatility scaling with the square root of time: move over n days ≈ VIX × √(n / 252). For one day, 17 / √252 = 17 / 15.87 ≈ 1.07%. On an index at 6,000 that is about 64 points: a day with a 64-point move is an ordinary one-standard-deviation day, and about one day in three should be bigger. For a month of 21 trading days, 17 × √(21/252) = 17 × 0.289 ≈ 4.9%, the same band the chart shows.
Your turn
Open Market Overview, click the VIX tab and read the level. Then open SPY in Price Context and read IV 30d and HV 20d. Divide the VIX by 15.9 to get the daily move it implies, and check whether SPY's implied sits above its realized.