Thursday, March 6, 2008

Next Up: VIX 101

It looks like I will be out of pocket for the day, so I thought I would take this opportunity to encourage some reader input.

One of the mini-projects that I want to get up an running soon is a series of posts that I will probably be calling VIX 101. Essentially, this should provide answers to some of the most common questions that readers have about the VIX and volatility, starting with the basic and obvious, such as:
What is the VIX?
How is the VIX calculated?
What triggered the creation of the VIX?
Can I trade the VIX?
How is the VIX used as a hedge?
How do investors use the VIX to time the market?

So...what other important questions about the VIX and volatility should I address?


Anonymous said...

What do some of the VIX:XYZ ratios (suhc as VIX:SDS, VIX:VXV, SPX:VIX etc.) mean, and why they may be important?

Bruce Long said...

In what way(s) has the VIX been firmly established to be better than the VXO (old VIX) as a predictor?

Anonymous said...

The statistical data for VIX mean reversion, based on distance from MA's or from the regression line you once presented.

Thanks for all your good work!

Anonymous said...

what is the best way to trade with a view on the vix? options, futures, etc.

how does the fact that spot vix is a representation of the implied vol 30-days forward, affect trading strategies?

how closely related are the futures with the spot index?

PS - keep up the great work

Anonymous said...

Looking forward to VIX 101... thx!

Anonymous said...

Perhaps you might comment on technical patterns and trading signals? How true may they be, and what indicies may be most related, + or -?


Unknown said...

reading all of the above articles will lead to further thinking/questiins for me.

Unknown said...

The relationship between VIX futures and options -- or more specifically, the disconnect between the cash VIX and VIX options -- should probably be emphasized. Links to the CBOE VIX minisite & the monthly CFE newsletter on volatility that Larry McMillan writes might be useful.

The various VIX ratios are interesting, but I haven't found them to be good for capturing the relative intraday movements of the SPX and VIX... stacking the two charts 5-min. or even 1-min one-day charts on top of each other is a good way to see this.

Today was a good example of this, going into the close, it looks like the SPX is going to be down about 11, and the VIX will be pretty flat, down about 0.10 -- not particularly profound from a SPX:VIX ratio perspective. But looking at it intraday, we see an opening down move in the SPX and a gap up in the VIX, a steady drop of the VIX during the first hour rally of the SPX, then the VIX rising throughout the market selloff during most of the day, and then AFTER the SPX hit its intraday low and rallied up in the late afternoon, the VIX reached its intraday high and dropped sharply. Finally, as the SPX drifted down into the close, the VIX rose up.

Put another way, a comparison of the VIX to the absolute value of the SPX is not nearly as useful or interesting to me as the dynamic, relative movement of the pair. I haven't put enough effort into describing this mathematically, but a crude version would be to plot the % change of the SPX vs. the % change of the VIX.


GS751 said...

that would be really cool.

Bill Luby said...

Excellent comments, all. I'll see what I can do.



Anonymous said...

I always thought the VIX was more or less the Put/Call ratio for the SPX. I would love to see a more exact definition.

Eduard Seligman said...

Felicitation for your excellent blog. One may also add the following questions regarding the VIX : 1) Does the Vix (the futures) really work ? Are there some arbitrage opportunity between the options and the futures ? how can a long VIX strategy potentially be used as a hedge to the S&P portfolio ?


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