Momentum Breakouts: How To Track Volatility With VIX Index
The VIX is calculated using a rather complex formula to derive expected volatility by averaging the weighted prices of out-of-the-money puts and calls. Fortunately, the calculation is performed by the CBOE exchange, so the trader doesn’t have to perform complex mathematical calculations to derive volatility levels manually.
There are two common misconceptions that many beginners options traders have about the VIX index. First, VIX uses both puts as well as calls to calculate it’s value. I’ve stumbled upon several articles and videos over the past few years that forget to mention that calls are involved in the calculation to the same extend as puts.