why is it called the VIX


The ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking and is calculated from both calls and puts. The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge".

There are three variations of volatility indexes: the VIX tracks the S&P 500, the VXN tracks the Nasdaq 100 and the VXD tracks the Dow Jones Industrial Average.

www.investopedia.com definition. How to use it is another story, obviously.

Don
 
Quote from Don Bright:


The ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking and is calculated from both calls and puts. The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge".

There are three variations of volatility indexes: the VIX tracks the S&P 500, the VXN tracks the Nasdaq 100 and the VXD tracks the Dow Jones Industrial Average.

www.investopedia.com definition. How to use it is another story, obviously.

Don
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This is the whole point, I UNDERSTAND why it happens, but it shouldn't be referred to as volatility because its NOT. I understand its IV, and I understand IV drops on rallys and rises on selloffs. I understand that its the premium people pay etc, but a TRUE IV should move the same regardless of direction. (Yes, I know this is how options makers make their money and its a market driven economy and if ppl want to pay up for vol than thats fine and thats what happens when a market plunge happens).

But why refer to it as volatility when its clearly not, or at the very least has a directional component.

At best its confusing for people trying to get involved in options or understand how they work and its used interchangably to describe volatility (a mistake in itself but then its called the VIX!)
 
Quote from empee:

But why refer to it as volatility when its clearly not, or at the very least has a directional component.

At best its confusing for people trying to get involved in options or understand how they work and its used interchangably to describe volatility (a mistake in itself but then its called the VIX!)
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You are still missing the point.

People who are involved in options trading ONLY care about IMPLIED VOLATILITY.

Again, options traders don't care about realized volatility, only IMPLIED.
 
There are always natural buyers of out of the money puts and sellers of out of the money calls which creates the volatility skew. It’s not a market maker thing only to the degree that they all know for the most part how the skew runs and they stay ahead of the curve. Market makers don’t control the order flow into the market.

If you are not willing to accept the fact that this index is based on actual options implied volatility and not some gauge of what a person may or may not perceive as volatility in the market then you’ll continue to be upset by the index’s name.
 
Quote from empee:

This is the whole point, I UNDERSTAND why it happens, but it shouldn't be referred to as volatility because its NOT. I understand its IV, and I understand IV drops on rallys and rises on selloffs. I understand that its the premium people pay etc, but a TRUE IV should move the same regardless of direction. (Yes, I know this is how options makers make their money and its a market driven economy and if ppl want to pay up for vol than thats fine and thats what happens when a market plunge happens).

But why refer to it as volatility when its clearly not, or at the very least has a directional component.

At best its confusing for people trying to get involved in options or understand how they work and its used interchangably to describe volatility (a mistake in itself but then its called the VIX!)
More...

I always like a civil discussion (sometimes hard to find on ET, LOL).

I'm not sure I get your point about the same in each direction.

However, we think it's simple. Institutions doing covered writes on the way up (lower vol), and they buy protection puts on the way down (higher vol).

Not a heck of a lot more too it, Atticus can probably go into more depth if he wants to. He's more current with all the technical aspects.

Don
 
Don, that what I alluded to in natural buyer of puts and sellers of calls. It also feeds on itself in that since the puts will outperform their delta in a falling market ( rising IV ) and under perform their delta in a rising market ( falling IV ) even more skew is created. You’ll find days when the SPX is up and many OTM calls are down.
 
Quote from xflat2186:

Don, that what I alluded to in natural buyer of puts and sellers of calls. It also feeds on itself in that since the puts will outperform their delta in a falling market ( rising IV ) and under perform their delta in a rising market ( falling IV ) even more skew is created. You’ll find days when the SPX is up and many OTM calls are down.
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Limited downside on stocks, unlimited upside, probably has something to do with calculations.

Don
 
Williams constructed a synthetic version which you can apply to any market:

Here is the TS code for it. Change the input values to suit your preference

{ Williams Simulated VIX}

inputs:
Length( 5 ),
OverSold( .1 ),
OverBought(.5),
OverSColor( Green ),
OverBColor( Red ) ;

Variables: WVF(0);

WVF =(Highest (Close,22)-Low[1])/(Highest(Close,22))*100;

Plot2(WVF,"WVF");
Plot1(Overbought,"Overbought");
Plot3(Oversold,"Oversold");

{ Color criteria }
if WVF > OverBought then
SetPlotColor( 1, OverBColor )
else if WVF < OverSold then
SetPlotColor( 1, OverSColor ) ;

{ Alert criteria }
if WVF > OverBought then
Alert( "VOLATILITY EXTREME High !!!" );
if WVF < OverSold then
Alert( "VOLATILITY EXTREME Low !!!" ) ;
 
Quote from Landis82:

You are still missing the point.

People who are involved in options trading ONLY care about IMPLIED VOLATILITY.

Again, options traders don't care about realized volatility, only IMPLIED.
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Realized vol is critical for anyone who trades gamma.
 
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