Is the VIX Being Gamed?
In Fear Index Now Inverse to VIX, Zero Hedge recently put forth the idea that the VIX is “being gamed by volatility sellers” and may be “the most behind the scenes manipulated index.”
Several readers have asked me to comment on this. In short, I do not believe the VIX is being gamed to any significant extent. Among the volatility data I watch are the correlations across the various major volatility indices, including the VIX, VXN (for the NASDAQ-100), RVX (for the Russell 2000), VXO (for the S&P 100 index) and VXD (for the Dow Jones Industrial Average.) Historically, the lowest of these correlations has been the two market cap extremes, a 97% correlation between the RVX and the VXO. Frankly, I have not seen much of a deviation from historical patterns over the course of the past few weeks. The charts below show all five volatility indices over the course of the past one month (top) and three months (bottom). If there is any evidence to support the VIX as deviating from the other volatility indices, I don’t see it.
Note that because the VXO does not have any options or futures associated with it, gaming that volatility index would likely be the most difficult and expensive of the group. Also consider that because the components of the VXO have the largest market caps of any of the volatility indices, one would expect changes in the VXO to be less dramatic than those of the other indices that are populated by smaller and more volatile companies.
For related posts on the other secondary volatility indices, try:
- Overview of U.S. Volatility Indices
- The Evolution of the Volatility Index Family Tree
- Comparative Volatility Indices
[source: BigCharts]
Disclosure: Long VIX at time of writing.
12 comments:
Since the VIX is pretty much for the savvy trader, I highly doubt it is being "gamed." I think it is facing issues with alternative ways for the retail investor to hedge, and may deviate from historic correlations... but I do not think it is being manipulated. If someone could show a spike in retail VIX trading, it may make sense.
I agree with Bill Luby on this and do not see evidence from the volatility data that vol sellers are manipulating the data.
Can someone clearly show me how this is being done?
Thanks
Wallace Wormley
wpw@ospara.com
On Twitter: chilidog3
Any thoughts on the steepening skew (especially as CDS spreads compress dramatically)? and implied correlation? both will tend to favor a lower VIX but at the same time can be a bearish bet. Single-name vols are still elevated relative to the drop in VIX (i.e. implied correlation remains at the low end of its recent range).
Bill I haven't noticed any unusual VXO action in the 5 day totals of daily VXO times daily CBOE combined P/C ratio I call the "2CS". It is that five day product that has kept me long for the past few months.
I had this exchange with a good friend at my site after I recently posted an update on 2CS:
Tom,
FYI re VIX. perhaps this is why the 2C's are experiencing a signal/noise ratio issue (?)
Look at comment made by "credittrader".
Regards.
Posted by: Alex | July 30, 2009 at 10:43 AM
alex,
I didn't see "credittrader's" comment, but I did see Bill Luby, my "VIXpert" and on my list of "Blogs I Like", post on the suggestion of some that VIX is being "gamed". In a word, Bill says "no".
My guess is that bears are disappointed that VIX isn't coming down as it is supposed to do near tops. I have been more amazed by P/C ratios than VXO recently.
Bill also points out that VXO would be inherently difficult to game since it has no options for sale (or buy)."
Tom
If $VIX is not gamed, how do you explain the action lately... refer to the chart..
http://3.bp.blogspot.com/_iqGnA_FxBfs/SnRFzk-eOeI/AAAAAAAAC4I/FgqyLEySJcU/s1600-h/VIX-SPX.png
http://3.bp.blogspot.com/_iqGnA_FxBfs/SnRFzyd1P_I/AAAAAAAAC4Q/Xpsjvbj7qrY/s1600-h/VIX-SPX-2yr.png
Bill, what do you think about the dollar collapse delaying a market top?
http://market-ticker.denninger.net/archives/1278-Uh-Oh....-GDP-Interpretation.html
Vol trading is pretty simple. On a daily basis, the underlying either moves a standard deviation and you cover your theta or it doesn't. If someone was gaming the VIX lower, the only person it would benefit would be the locals buying the options from the sellers. The best way to tell if the VIX is out of whack is to compare IV to HV. One month realized on the SPY is only 20.
one more thing. it looks like the CSFB index is an index of put skews. The fact that put skews are highly elevated right now makes sense. We have rallied so much recently that people are betting on a reaction lower.
Maybe the VIX isn't purposely gamed, but there is a ton of volatility sellers out there. Fact is, options are predominantly sold rather than bought because only a fool would plunk down money on an asset that immediately loses value after you buy it. When you sell SPX options, the VIX goes down. Options selling is especially prominent in today's "blitzkrieg" market where the market ordinarily has low volatility and just drifts around but once in a while it'll have a big surprise move that will catch you off guard and make you lose your shirts. Such is the environment created by high-speed electronic trading that can move the market widely on short notice.
Welcome to the future.
All said, I still think it likely that those complaining of VIX "games" are unhappy stock market bears.
The game occurs on the expiration of the VIX options when the settlement price (VRO) is determined. If you have a big position in VIX options, and have an interest in the settlement price being near some value, you can enter large orders in out of the money SPX options on the open rotation to get trades done that will influence the VIX's settlement. You're willing to lose some money on the SPX position if you're making enough on the VIX position. It's not something retail traders can do.
Thanks for all the excellent comments here and Tom D., I am always interested in hearing your take on the 2CS.
In retrospect, now that the earnings season is almost over and the July employment report it out, it seems as if the VIX floor of 24-25ish will soon be taken out, with a VIX of 20-22 more likely to be the next stop for this volatility indicator.
Cheers,
-Bill
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