Calculation and mechanics
The basis is options on the Nasdaq-100 (NDX) and the Russell 2000 (RUT) respectively. As with the VIX, a large number of puts and calls across various strikes enter the calculation. Options with maturities around 30 days are weighted so that a constant expected volatility over a 30-day horizon results.
The values are annualised. A VXN of 25 does not mean that the Nasdaq-100 is expected to move 25% over the next 30 days. It corresponds to an expected volatility of 25% per year. Converted to 30 days that is 25% divided by the square root of 12, about 7%. Like the VIX, VXN and RVX show the expected size of the swings, not their direction.
VXN and RVX vs. VIX
The VXN is in effect the VIX of the Nasdaq-100, the RVX that of the Russell 2000. VXN and VIX use the same basic calculation approach but different index options: the VIX uses SPX options on the S&P 500, the VXN NDX options on the Nasdaq-100. The Nasdaq-100 comprises 100 of the largest non-financial companies listed on the Nasdaq and is therefore more concentrated than the S&P 500 with around 500 companies from all sectors. It is also more heavily shaped by technology and growth companies. This composition often leads to higher expected swings, which is why the VXN often sits above the VIX.
So it is not only the level of the VXN that is informative but also its gap to the VIX. If the VXN rises more than the VIX, the expected volatility of the Nasdaq-100 increases relative to the broad market. This happens for example when several large Nasdaq companies are about to report their quarterly earnings.
The RVX applies the same logic to the Russell 2000 and thus to smaller US companies. Small caps often react more strongly than large companies to changes in funding costs, economic expectations and credit conditions. The RVX therefore also usually sits above the VIX. A widening gap between RVX and VIX shows that the option market prices in larger swings for small caps relative to the S&P 500.
For such comparisons you can use the difference in index points or the ratio, for example VXN/VIX or RVX/VIX. Both place the expected volatility of a market segment relative to the broad market but say nothing about the future price direction.
VIX, VXN and RVX measure the same kind of metric for different equity indices: the annualised 30-day volatility priced in by the option market. The VVIX, by contrast, measures the expected volatility of future VIX values.
The IV of an ETF such as QQQ or IWM is based on the options of that ETF. It often moves similarly to VXN or RVX respectively but is not the same metric. NDX and RUT options are European style and cash-settled. QQQ and IWM options are American style, settled by delivery of ETF shares and affected by the ETF's distributions. This is another reason why the values differ somewhat.
Sources
Related terms
- VIX (CBOE Volatility Index)
- VVIX (CBOE VIX of VIX, volatility of volatility)
- Implied Volatility (IV)
- IV Rank (IVR)
All market and analytical information is provided for educational and analytical purposes only and does not constitute investment advice or a trading recommendation.