Monday, October 27, 2008

Fear Is on the Decline

With the VIX currently at 77.13, it may seem like a strange time to talk about fear starting to leave the markets.

As I type this the VIX is down 2.00 and the SPX is down about 15. The fact that the VIX and SPX are both moving down this morning is unusual, but not unheard of. What makes the situation even more interesting is that it is happening on a Monday, when the VIX typically 'springs ahead' to account for the 'calendar reversion' effect in which the VIX is priced according to the calendar, but only calculated during trading days. The long and the short of this is that market makers tend to drop option prices on Fridays in anticipation of the coming weekend and raise them on Mondays.

We now have two Mondays in a row without any of the jaw-dropping end-of-the-world headlines many investors have come to fear. For that and other reasons, there markets seem to be less caffeinated this morning and the VIX is finally starting to feel the effects of gravity.

5 comments:

Anonymous said...

On the other hand, what do you make of the VXV spike today?

Bill Luby said...

Nice call ;)

VXV was what I was going to post about instead of the VIX, but at the last minute I changed my mind.

I think the VXV spike is particularly interesting. I will post more about this later, but I consider VIX and the 30 day time horizon to be more about event volatility and VXV and the 90 day time horizon to be more about structural volatility...so I would say this is an indication of serious concerns about persistent volatility and hence structural soundness.

I hope this helps.

-Bill

Anonymous said...

Thanks. I was afraid you were going to say that.

Mikkel said...

Where can you look up VXV? I haven't been able to find it.

Also your interpretation makes sense as governments around the world seem to have decided to not let any more failures happen, but now systemic risks are going sky high.

The governments have basically gone "all in" not only trying to support their financial systems but their currencies as well. It's hard not to jump in but there are now so many extreme bets placed that technical indicators are basically useless IMO.

Bill Luby said...

Hi Mikkel,

You can get some information about the VXV from the CBOE: VXV splash page, but if you click on posts with the VXV label on VIX and More you can probably find more information here than anywhere else on the web.

For a current quote on VXV you are probably best off going through your broker.

Cheers,

-Bill

DISCLAIMER: "VIX®" is a trademark of Chicago Board Options Exchange, Incorporated. Chicago Board Options Exchange, Incorporated is not affiliated with this website or this website's owner's or operators. CBOE assumes no responsibility for the accuracy or completeness or any other aspect of any content posted on this website by its operator or any third party. All content on this site is provided for informational and entertainment purposes only and is not intended as advice to buy or sell any securities. Stocks are difficult to trade; options are even harder. When it comes to VIX derivatives, don't fall into the trap of thinking that just because you can ride a horse, you can ride an alligator. Please do your own homework and accept full responsibility for any investment decisions you make. No content on this site can be used for commercial purposes without the prior written permission of the author. Copyright © 2007-2013 Bill Luby. All rights reserved.
 
Web Analytics