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How S&P 500 options may be used to manipulate VIX ‘fear gauge’

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Pedestrians walk by the Chicago Board of Options Exchange (CBOE) building on February 11, 2011 in Chicago, Illinois.

Are traders manipulating options tied to the Standard and Poor’s 500 to inflate the settlement value of a popular volatility index known as the VIX—and skimming profits?

No, says the Chicago Board Options Exchange, which recently reported a fourth consecutive year of record index trading, posting new highs in SPX options and VIX futures.

But some investors and financial academics—and even one of the VIX’s VIX, +0.77% designers—say heavily traded VIX derivatives are vulnerable to an index settlement mechanism calculated once a month from underlying SPX options that are less liquid.

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