Options have fixed expiry dates, in the past, the 3rd Friday of each month. For example, on
Question:
Options have fixed expiry dates, in the past, the 3rd Friday of each month. For example, on April, 1st 2020 you have options expiring in around 17 days (3rd Friday of April, called the front-month option) and the second closest expiry is 3rd Friday of May. On April, 2nd 2020 the front-month option expires in around 16 days (3rd Friday of April), i.e., the days to expiry decreased. And so on.
VIX tracks the price of a variance swap expiring in 30 days, i.e., the days to expiry are fixed. As you recall, VIX is calculated by summing up option prices, which as we discussed above, have fixed expiry dates but varying time to expiry.
How is that possible? How can you calculate the fixed 30-day variance from options with varying days to expiry?
Auditing and Assurance services an integrated approach
ISBN: 978-0132575959
14th Edition
Authors: Alvin a. arens, Randal j. elder, Mark s. Beasley