Ewj: elliott wave
- Thread starter mu200411
- Start date
."My friend John told me something arcane, hard to interpret, but perhaps meaningful.
Index option prices have come way down. He measures it by âimplied volatility.â For example, with an SPX index option trading at a certain price, his model might say that the price implies at 30 volatility. This means the option price is implying that the index will move up or down 30% over the next year.
Now, an index option price is driven by 2 things: The volatility of all the underlying stocks and the correlation between those stocks. The first part is intuitive; the second is not.
Letâs pretend an index has only 2 stocks in it: A and B. If A goes up and B goes down, they cancel each other out, and the index is unchanged. But if A and B go down together, the index moves a lot. So when the correlation is low between stocks, the index volatility tends to be low; when the correlation between stocks increases, the volatility of the index rises.
Based on the option prices of the underlying stocks as compared to the option price of the index, his model can measure the implied correlation between stocks.
He tells me statistically something is happening the degree of which is very rare. Even though the option prices and the implied volatility of the stocks has dropped a lot, the implied correlation has remained near all-time highs.
After saying âso what,â he finally got to the punch line. This means that â to a very great degree â the money coming into the market (as it rises) is almost all coming in through equity index futures.
Even I know what that means: The money coming into the market isnât picking stocks on fundamentals, etc. It just wants to be in stocks.
You can make your own conclusions on that one."
- - - From Minyanville
Index option prices have come way down. He measures it by âimplied volatility.â For example, with an SPX index option trading at a certain price, his model might say that the price implies at 30 volatility. This means the option price is implying that the index will move up or down 30% over the next year.
Now, an index option price is driven by 2 things: The volatility of all the underlying stocks and the correlation between those stocks. The first part is intuitive; the second is not.
Letâs pretend an index has only 2 stocks in it: A and B. If A goes up and B goes down, they cancel each other out, and the index is unchanged. But if A and B go down together, the index moves a lot. So when the correlation is low between stocks, the index volatility tends to be low; when the correlation between stocks increases, the volatility of the index rises.
Based on the option prices of the underlying stocks as compared to the option price of the index, his model can measure the implied correlation between stocks.
He tells me statistically something is happening the degree of which is very rare. Even though the option prices and the implied volatility of the stocks has dropped a lot, the implied correlation has remained near all-time highs.
After saying âso what,â he finally got to the punch line. This means that â to a very great degree â the money coming into the market (as it rises) is almost all coming in through equity index futures.
Even I know what that means: The money coming into the market isnât picking stocks on fundamentals, etc. It just wants to be in stocks.
You can make your own conclusions on that one."
- - - From Minyanville
Quote from ed:
VIX seems to be forming an ED finish....
We'll have to see how that little "ed iv" morphs. An ideal timing would see the VIX pop up for ed iv, then make one final drop to ed v.
Correspondingly, the SPX should drop a little today (Tue) then make its final leg up tomorrow and/or Thur before it's time to wake Winnie the Pooh from his slumber.....
Would Winnie the Pooh slay Taurus the Bull?
VIX daily
http://www.elitetrader.com/vb/attachment.php?s=&postid=2413851
PS: A combined drop in the SPX and strong upmove in VIX would do wonders to one's collection of puts.
Well, we got that little drop in the SPX yesterday (Tue), and the futures seems to hint of some upmove later.
Would it be the final leg up? Wakey Winnie....
Landis,
Thanks for the article. I was a little skeptical focusing so much on the VIX, but am now convinced after reading your post. Thanks!
