A study on VIX index and volatility trading

Abstract

In many markets there is a high demand for instruments whose pay-off is equal to volatility. Options provide an imperfectmeans of hedging volatility. Volatility trading has been carried out mostly using traditional methods. VIX Index provides analternative to such methods and is one of the widely accepted methods for hedging volatility. In an effort to test this belief, inthis paper, we calculate VIX index using the CBOE procedure, we draw comparisons between implied and realized volatility,identify if there is a delay between actual S&P index movement and VIX index reflection of the same, and finally conclude byanalyzing if VIX can actually provide a pure way of hedging volatility. We briefly look at the Indian VIX index and itscalculation methodology.