Volatility Metric: The VOLI Index explained - Is it a VIX killer?

Jul 11, 2019

VTS Community,

I'd like to continue filling out the Volatility Dashboard metrics, and the next two on the list both involve an index that you may not be familiar with.

Nations VolDex (^VOLI)

The VIX index has been around since the early 1990's, and was improved upon with an update to its methodology in 2003. Since then it's been virtually unchallenged in the space.

Now every now and then something comes along promising to be an improvement on the VIX, but nothing has had any staying power. The VIX index is by far the most used and talked about method of quantifying market volatility.

Although it's been around for several years, the VOLI has largely remained unknown even to this day. However, it has an interesting methodology that I feel makes it worth following and perhaps it should get more attention than it does.

It's important to keep in mind though, VOLI is not a VIX killer. It's not a replacement for the VIX. It's actually a compliment to it and both can be valuable analysis tools. And as I will show in a future article with the next metric in the Volatility Dashboard, when used together they do provide some meaningful insight.

VIX index vs VOLI index

*VOLI launched in June 2013, so i'm using simulated values back to January 2005.


They look very similar don't they? But as they say the devil is in the details, and their methodology is slightly different.

  • The VIX Index is a calculation designed to produce a measure of constant, 30-day expected volatility of the U.S. stock market, derived from real-time, mid-quote prices of S&P 500® Index (SPXSM) call and put options.

  • The Nations Large Cap VolDex Index (VOLI® ) measures the implied volatility of a hypothetical precisely at-the-money SPY (SPDR S&P 500 ETF) option with precisely 30 days to expiration.

Do you see the subtle difference there?

The VIX index is based on all options on SPX, where as the VOLI is calculated only from at the money options on the SPY.

Now of course depending on the type of trading a person does, one or the other may be more useful. I would submit though, I'm more interested in what's happening at the money. So for me personally the VOLI is more useful than the VIX.

Homework assignment:

Given that the VIX uses all SPX options and VOLI uses only at the money options, can you think of a practical method of using the two indexes together? That will be Volatility Dashboard metric #12, and I'll give you the answer soon, but feel free to email me your ideas :)

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