It is just a simple calculation of Average True range. High to low of each day averaged over X days.
Is the VIX still pertinent?
- Thread starter Jdesey
- Start date
It is just a simple calculation of Average True range. High to low of each day averaged over X days.
For starters, VIX is NOT expected volatility, but fair variance.
Nobody is buying options because the realized volatility is so low. Absence of realized volatility is the main reason why implied vol and variance are so low. If realized volatility would be higher, people would buy options to delta hedge them and VIX would go up. Or volarb books would buy variance swaps, which dealers would hedge with the front strip plus VIX futures and VIX would go up.
dude, that quote came from the CBOE on how VIX is calculated........
http://www.cboe.com/products/vix-in...d-futures/vix-index/the-vix-index-calculation
ok, look at SP500 and the VIX on these 2 dates.
Aug 24, 2015 price drops to 1865 and VIX shoots up to over 40.
Jan 20, 2016 price drops even lower to 1812 and VIX only goes to 27.
All time VIX historical average is approx 19-20, so this larger price drop and VIX barely goes above historical average on Jan 2016.
A bigger drop in price but VIX doesn't spike nearly as high. The reason is on Aug 24 there was panic buying of options hence, prices went up for options, hence VIX went up. People expected the volatility to continue so they bought options to protect their long positions.
People think VIX predicts the movement of the underlying. It doesn't. It simply reflects the prices people are willing to pay for options on the underlying.
Even if realized volatility was higher it doesn't mean VIX will rise if people expect that volatility will come to an end then they don't buy options, which is what happened Jan 2016. People expected price to recover and it did.
Why buy insurance if you don't need to........
Low VIX is likely to become the norm for a very long time.
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CBOE gives a simplistic layman explanation (white paper should have a better description, btw, read it). Any serious trader should know what exactly the VIX index represents and how it relates to realized volatility.
Including the big move on that day, forward looking 30 day realized vol in Aug 24th 2015 was around 32%, while in Jan 20th 2016 it was about 21%, so the risk-premiums are more or less consistent. Nobody cares what the level of the index is, when people buy implied vol they only care about realized volatility. We had low realized vol in the past 3-4 years, so VIX is low. RV over the past 21 BD is 8.2, why would you want to buy vol in this environment?
Great so you agree with me. Since actual vol has been low for years (on average compared to historical) people are just not buying vol (options). Hence the VIX has dropped to well below it's historical average.
My point is that even if some volatility returns it does not mean VIX "must" rise. The price could drop from 2400 by 400 points and VIX may only go to 20-30 if people feel the price will return to 2400 in a reasonably short amount of time.
There is no direct correlation between the price of the underlying and the VIX. There is a direct correlation between the option prices and VIX though. So if you are trading options then yes, VIX is important.
As you know VIX can't keep going up forever because that means people would be paying higher and higher prices for options which they won't do.
I would love it if VIX shot up, but honestly I don't see the historical avg of 19-20 ever coming back. I think 10-15 is going to be the new normal.
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LOL. If we drop from 2400 to 2000 in one day (an 18% move), VIX will go to at least 65 (simple back of the envelope gives me sqrt(252*(0.18^2)/21) even if zero is realized on other days).
It dropped from 2117 (Nov 2015) to 1812 (Jan 2016) that is 307 points and VIX went from 15 to 27, a jump of 12 points....
You aren't looking at why did the price drop by 307 points and VIX only goes up 12 points.
Also I didn't say 1 day drop, I said a short amount of time. 2 months is relatively short time.
Look at Aug 24 VIX shoots up to 40 then drifts down to 20 within a few days even though the underlying is still down 200 points. Why is this? because nobody is buying more puts forcing price of options up.
VIX is not a good indicator anymore.
Markets have changed.
90% is traded by robots, mostly on forex, futures and stocks, and they don't care about options with small volume.
They don't need to protect their position or to hedge like normal investors. Most off them make short duration trade only, not talking about HFT too...
Markets have changed.
90% is traded by robots, mostly on forex, futures and stocks, and they don't care about options with small volume.
They don't need to protect their position or to hedge like normal investors. Most off them make short duration trade only, not talking about HFT too...
The VIX is an index derived from option prices posted in an active market.
We don't know any such value as "future volatility", so we have to make due with the volatility implied by the way applicable options are priced: Implied Volatility.
In 2017, you don't even need to settle for the amalgam "VIX" -- you can post the Implied Vol of any series you wish, for any price you wish, right now.
Figure out what it really is that you want this "vol" thing to do in spacing/placing your trades, and then zero in with the data already available to you. Not many do it, but it's really simple, and *very* responsive.
Step #1? Post a column of implied vol in your options data. Just watch it for a while.
The VIX does in fact move when you see decent swings on the S&P.
1) Your use of the phrase "VIX didn't budge much" implies it did move but just not in a way that you expected or wanted or use to seeing.
2) You need to look at the historical intraday movement of the S&P 500 Index, SPY or Emini ES and then compare to current levels. The VIX does move and its current levels of intraday movement is in line which its historical intraday movement when at these low levels.
3) Many folks like to take it easy, sit on the sidelines, vacation, take time off from the markets, lower their position size, lower their number of trades or whatever when the VIX is this low.
Simply, those that use the VIX in their trading...most likely still do and do one of the above until market conditions are suitable for their trade method.
Personally, I hate a low VIX especially when its lasting many months...I do a lot of gardening work when its like this.
P.S. Use Google to look for explanations about why the VIX is so low and expected to be like such for awhile. Lots of decent facts and theories out there.
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