The VIX
(Senior Baboon, 186
Points)
on 11/28/11 at 12:53pm
I'll preface this by saying I don't have hard data to back it up, but am I the only one who believes the VIX does not accurately reflect volatility in the market?
From what I understand it's based off prices of S&P 500 index options, but I honestly can't wrap my head around why the market can swing wildly some days and the VIX doesn't budge. It's quoted constantly on CNBC, but how should we interpret moves in the VIX other than simply "volatility."
pretty sure volume has
pretty sure volume has something to do with it.
If I disagree with you, it's because you're wrong.
CiroCorp, I recommend you
CiroCorp, I recommend you read the whitepaper about how the VIX is calculated.
Also, your assumption:
market "swings wildly" -> VIX must move
... is incorrect. A move in the VIX is a change in volatility, in particular implied volatility.
The VIX spikes when options
The VIX spikes when options on the constituents of the S&P500 get bought up (in turn increasing implied vols and therefore the VIX value). The difference that you're likely noticing is that this buying up of options (puts, generally) typically only happens once per what we'll call a "scare cycle". When you think about this, it makes sense. If you're concerned about the market tanking, you'll buy downside protection. When the market is a bit more stable the next day or week, you don't necessary sell your downside protection immediately because there's likely residual uncertainty and most investors are very risk-averse (especially after 2008). Because of this, after the initial scare or initial (usually) unforeseen catalyst, the VIX doesn't behave exactly how we would expect.
Also, as an aside, if you're watching the spot VIX and not VIX futures values, you're not seeing what's actually happening in the VIX market per se. You'll find that VIX futures typically react a bit more like you would expect.
If you are looking at spot
If you are looking at spot VIX, you want to pay attention to the roll dates. Take a look at the CBOE website for more info on this.
VIX is not a tradeable asset
VIX is not a tradeable asset pe se. It's just an index number with its own quirks.
Also, due to the structured financialization of every conceivable concept ibankers come up with, VIX has started to become the tail that wags the dog.
http://ftalphaville.ft.com/blog/2011/04/07/534376/...
the hunger for more
1) You can trade VIX, of
1) You can trade VIX, of course.
2) VIX is implied future volatility, a reflection of market expectation, not actual volatility. It is the same concept with Variance swaps or volatility swaps.
3) VIX is calculated using near term put and call options
Gambler Daily
GekkotheGreat wrote: 1) You
1) You can trade VIX, of course.
How are you suggesting one can trade spot VIX?
As I said, VIX is calculated
As I said, VIX is calculated using near term puts and calls. So spot VIX is not realized by trading. You take long or shot position using futures, options, or ETFs.
Gambler Daily
Right, but your first point
Right, but your first point was that you can trade VIX. I guess I'm just confused about what you meant...
Well, when I said trading, I
Well, when I said trading, I meant taking long or short position or simply placing bets. It is not in the same sense with the equity market, since owning spot VIX conceptually makes no sense. Hopefully, I am more clear this time.
Gambler Daily
GekkotheGreat wrote: Well,
Well, when I said trading, I meant taking long or short position or simply placing bets. It is not in the same sense with the equity market, since owning spot VIX conceptually makes no sense. Hopefully, I am more clear this time.
Well you can't directly trade equity indexes either.
You can trade the VIX just like any other index, either via swaps or futures (with some basis risk) or ETFs/ETNs.
... I was simply comparing
... I was simply comparing those two conceptually. If you buy SPY, conceptually, you own a little bit of each company in S&P, since that's how those ETFs set up.
Gambler Daily