why does the VIX only go up when the market is down? how is it calculated so that this is the case?
That’s not true. Sometimes it goes down when market’s down, sometimes it goes up when market’s up. There is a negative correlation between VIX and market direction though, but it’s not 100%.
The VIX is the implied volatility on at-the-money put and call options on the S&P 500. Generally, options get more expensive (price in more volatility) when the market is going down. This makes sense intuitively. If you own a basket of stocks and the market goes up, that is fine and dandy. It’s when the market goes down that you are willing to pay more for options to hedge your position.
The VIX doesn’t really make a lot of sense to me. To me volatility is up down up down. There were days last year in Oct and Nov where we would open -300, rally 300, lose 300, and close flat yet volatility would pretty much remain unchanged. To me it seems as though the VIX is just a measurement of how much the S&P deviates from its sma.
Chuckrox8 Wrote: ------------------------------------------------------- > The VIX doesn’t really make a lot of sense to me. > To me volatility is up down up down. As Tobias said, he VIX is the implied volatility on put and call options on the S&P 500. Its more of a forward looking measure - it goes up when investors predict or fear large market movements.
if thats the case, shouldn’t any volatility, whether it is an up movement or a down movement effect expected volatility, assuming that volatility clustering is real. there has to be more to it. directly to tobias, how many funds only hedge when the market goes down? isn’t it usually in their investing mandate to hedge pretty much all the time? i wouldn’t think that the effect of non-diligent fundies would have such an effect that there is a NEAR perfect inverse correlation between the VIX and the market.
Think about it this way. When markets go up they tend to go up slowly. When they fall they fall fast. It’s not always the case but generally so. That is why volatility is usually higher on the downside but not always.
They use a 30-day period because the options roll monthly. So you are looking at the front-month options because they are more liquid.
Matt, there really isn’t anything more to it than that. This isn’t actual volatility, it is IMPLIED volatility. VIX is basically a “solve for X” in the black-scholes formula for volaility. It typically moves inversely with the market because of what JTLD said.
haha… market goes up: everybody is cool… everyone can buy stock “knowing” that there will be little volatility and little risk, haha. 99.99% of people are saying, hey, i like getting richer without stress. market goes down: ahhh! half of market participants take bets on the end of the world and the others think of it as nothing and bet on a full and rapid recovery. 99.99% of people end up making some form of “bet” or at least they feel like they’re making a bet. i think we need to feel like they’re bets whether we’ve headed up or down. the VIX sucks.
MattLikesAnalysis Wrote: ------------------------------------------------------- > haha… > > > i think we need to feel like they’re bets whether > we’ve headed up or down. > > the VIX sucks. It’s not bets so much as hedges driven by fear. Institutions are net long. They overpay for puts on the S&P when the market is tanking.
a hedge is a bet. buying a stock is a bet. can you lose it all? yes. can you win double or more? yes. investing is gambling unless its done in the long-term where economic growth converts into returns for receiving stakeholders. taking out a hedge and holding it for less than 5 years is a bet. a hedge is not a long-term investment. if you’re hedging out all sytematic risk then you’re just buying a risk-free instrument. partial hedging is making a smaller bet. why don’t you just buy half as much if you’re going to hedge into the LT? we’re bookies. deal with it 
Today was one of those days Matt. S&P 500: +2.58% VIX: +4.87%
Most has been covered. Small technical point - market going up X pts is less movement than market falling X pts. e.g. Market rising 1000 to 1100 is a 10 % move. Market falling 1000 to 900 is a 11% move.
Is there an index for historical volatility (e.g. 30-day lookback window) as oppose to an implied vol index?
The VIX is a tool, nothing more. It doesn’t “suck” any more than P/C ratios or sentiment indicators “suck”. I would strongly advise you to avoid any VIX related trading products.
Ummm, no. Both of those are 10% moves. What I think you intended to say is that when the market falls by 10% and then rallies by 10%, the magnitude in terms of points is not the same. So if we are at 1,000, a 10% drop followed by a 10% rally will leave us at 990. Muddahudda Wrote: ------------------------------------------------------- > Most has been covered. Small technical point - > market going up X pts is less movement than market > falling X pts. > > e.g. Market rising 1000 to 1100 is a 10 % move. > Market falling 1000 to 900 is a 11% move.
If VIX is a measure of how many options are being traded… how does this translate into share prices? They are two different markets? If people become bearish and start to buy lots of puts, that doesn’t translate into the stock market falling since they aren’t actually going and liquidating their positions or going short?
Options are basically insurance policies (at least my understanding of them). So if the event never takes place, then they expire and nothing happens. So when people panic and buy lots of insurance policies… how does that affect the stock market? How does worry about a flood cause a flood?
Wow.