An improved model‐free implied variation index (AVIX) is proposed in this article. The AVIX is developed under a generalized semi‐martingale process with stochastic interest rates. An adaptive option screening mechanism is proposed to accommodate different market conditions. The effect of dividend protection is also considered. An empirical study of the China 50 ETF option market suggests that the AVIX is a better barometer of aggregate implied variation and investor sentiment than the traditional VIX. It reacts to market changes more rapidly and more sensitively. The AVIX also contains more information about future volatility and provides a more efficient forecast of future realized volatility. © 2016 Wiley Periodicals, Inc. Jrl Fut Mark 37:374–410, 2017