have an account?【sign in】Volatility Index Calculation Excel:A Guide to Volatility Index Calculations in Excel
craneauthorThe volatility index, also known as the Standard & Poor's Volatility Index (VIX), is a widely used measure of the implied volatility of S&P 500 index options. It provides investors with a real-time gauge of market sentiment and the perceived risk of investing in equities. Calculating the volatility index using Excel is a convenient and practical way to understand and apply this important financial tool. This article will provide a step-by-step guide on how to calculate the volatility index using Excel, including the necessary formulas and data input.
1. Understanding the Volatility Index
The Volatility Index, calculated using the VIX formula, is a real-time market-based measure of the implied volatility of S&P 500 index options expiring in three months. It is calculated using a mathematical model that takes into account historical stock market returns and option prices. The higher the VIX value, the higher the perceived risk of investing in equities and the more volatile the market is expected to be.
2. Calculating the Volatility Index in Excel
To calculate the volatility index in Excel, you will need to follow these steps:
a. Open a new Excel workbook or edit an existing workbook.
b. Add four columns to the right of the first row, labeled "Date", "High", "Low", and "Close".
c. Enter the dates and closing prices of your S&P 500 index stock options in the "Date" and "Close" columns. The "High" and "Low" columns can be filled with the corresponding high and low prices for each option.
d. Create a new column and label it "VIX_Calculation".
e. In the "VIX_Calculation" column, enter the formula "=VIX(D2,H2,L2,C2)". This formula will calculate the implied volatility of the option with the given date, high, low, and closing price.
f. Repeat step e for all options in your data set.
g. In the next column, label it "VIX" and enter the formula "=AVERAGE(VIX_Calculation)". This will calculate the average implied volatility for the options in your data set and provide you with the VIX value.
h. To adjust for the time horizon of your options, you can use the formula "=AVERAGE(VIX_Calculation * (1 + (RTI*DT_HORIZON))^(ITEM/365))". Replace RTI with the implied volatility time increment (e.g., 30 days) and DT_HORIZON with the option's time to expiration (e.g., 3 months).
i. Repeat step h for all options in your data set.
j. Finally, in the "VIX" column, enter the average implied volatility for each option's time to expiration.
k. To calculate the VIX value, average the VIX values for all options in your data set.
3. Understanding the Results
The calculated volatility index value in Excel can provide valuable insights into market sentiment and risk management strategies. By understanding the implied volatility of various S&P 500 index options, you can better predict market volatility and make informed investment decisions.
Calculating the volatility index in Excel is a simple and practical way to understand and apply this important financial tool. By following the steps outlined in this article, you can gain a better understanding of the implied volatility of S&P 500 index options and use this information to make informed investment decisions. Remember, the VIX is just one piece of the equation and should be considered alongside other important factors such as economic data, market trends, and personal investment objectives.