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The question comes up all the time about what does the VIX really
measure.
Vix measures and exactly ATM...exactly 30 day option. Not a put not a
call.
Let me translate VIX into real numbers on the DOW aassuming the S & P
100 and DOW correlate well.
VIX close today at 26.71 the VIX year is 312 DAYS(BY the way this why
most people can't back implied vol into the VIX...because it uses a
short year it's measure is higher than the simpole implied vols of the
components).
The square root of 312(this is hoiw we arrive at a one day measure) is
17.66. 26.71 VIX divided by 17.66 to normalize to a one day move is
equal to 1.5(I'm rounding so everybody remain calm).
Let's say the DOW is at 7900...with a VIX of 26.71 a typical 1 day rance
would be expected to be 7900 X .015 = 118 points.
The Dow should move +/- 118 points about 2/3 of the time so about 14 of
the trading days a month. This is a +/- 1 std dev move. About 5% of
the time the Dow should move(this would be 1 day month)about +/- 350
points...YIKES !!!!!
Remember implied vol is a consensus...it's kind of a garbage salad of
everything in the refrig.
Vol also is a measure of inability to hedgge so it should spike for
moves approaching NYSE/CME collars. It should spike on down days
because of the inability to obtain upticks..as well as the general trend
to go up on down days. It should spike on the day prior to a non
trading day...Fridays or days before holidays.
I could go on for pages but I just wanted to post a general review.
I did an interview with Bloomberg business news late this afternoon
about VIX becausse we had the highest recorded reading this decade this
afternoon and they wanted to understand the importance. They also
wanted to undersstand why the traditional relationship between price
movement annd volatility hadd decoupled...Vol up in up markets and Vol
up in down markets and they were doing a survey about that as well. I'm
actually anxious to see what the other folks in the industry had to say.
One last point...intraday vol. is the highest continuous measure in
recorded history. Not that a day or two days in history hadn't been
higher...but a constant period of this(going on almost 300 calander
days)has never occurred before.
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