Blog Archive

Monday, November 16, 2009

VIX



I know it's unusual for the author of a Blog to ask advise from his readers, but the VIX baffles me. I spent the weekend reading about, and plotting charts to see what so many find informative.

Above is a chart where I detected periods where the VIX moved the same way as the /ES. Those small red segments in the lower chart are the only times when the VIX did not move contrary to the /ES. I added a gray dash time line to help align these moments.

The blue line is the /ES plotted as an inverted chart. Pretty much the two charts follow each other. All I see is that an inverted chart of the market price follows the VIX. Currently I recognize that the market price is going up faster than the VIX is going down, but I don't get much out of that either.

I would really like to understand the importance of this index. I do understand how it is useful for option traders to place a value on options, and how that can be an indicator of pessimism. But that logic can be taken both ways.



Analysis presented on this Blog has only informational, and educational purpose, and does not represent a proposal for buying or selling currency contracts.

4 comments:

  1. Bob,

    I am trying to learn about the VIX as well. You are probably aware that the VIX (equation) is derived from the premium on options near ATM.

    The option prices (premium) therefore affect the VIX. My guess is that the volume of options WRITTEN/SOLD by large institutions far outweighs the volume of options WRITTEN by individuals. By controlling the amount of volume on option writing, one could potentially control the premium, thereby affecting the overall VIX. The last few days the market has moved up, but VIX has resisted moving below 22/23 level. I am wondering whether this (A) simply implies higher fear (topping) even though the market seems to melt upwards; OR (B) after the market forces have sold put/call options at a higher premium here, market stays flat and lowers the VIX to deflate option prices. I am unsure whether this helps, but thought I'd discuss. --Crush (disqus.com/crush1618)

    ReplyDelete
  2. I guess I'll pass on the VIX. Like you said it's used as a gauge of fear and complacency, but it seems too vague for me.

    I asked about the VIX on Kenny's Blog. Here is the response I got.

    StilesBC wrote, in response to KumoBob:

    EW measures emotions. The VIX is an emotion gauge. Good fit.

    It seems to carve nice patterns as well. So if the primary count on SPX isn't clear, one can count the VIX and get a clue to overall market action.

    ReplyDelete
  3. You may want to skim over this ... http://www.cboe.com/micro/VIX/vixwhite.pdf .

    --Crush

    ReplyDelete
  4. Thank for your comments. I found a site that posts an interesting chart, and has a good description of the interpretation.

    http://www.market-harmonics.com/free-charts/sentiment/pcvi.htm

    ReplyDelete

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