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<DIV>Hello RTs,</DIV>
<DIV> </DIV>
<DIV>I haven't read the Barron's article on VIX yet - but would like to
contribute my observations and comments on the various posts:</DIV>
<DIV> </DIV>
<DIV>I don't have intraday VIX data going back that much, nor source data for
options whereby we can simulate the VIX. </DIV>
<DIV> </DIV>
<DIV>This post will therefore restrict itself to putting a math perspective on
underlying market volatility; and won't mean much for short term options
trading. For every "volatility" word used hereafter, please read
"underlying security's ACTUAL volatility" and not option's implied
volatility.</DIV>
<DIV> </DIV>
<DIV><FONT color=#000000>Like BobR and the Doc indicated, raw Vix itself means
nothing from a trader's point of view - and even a blanket statement like
"if Vix goes down, SPX/OEX goes up or vice versa" can get the trader
into trouble very fast if that "going down/up behavior" occurs when
the underlying fundamentals are going through a change.</FONT></DIV>
<DIV><FONT color=#000000></FONT> </DIV>
<DIV>My interpretation is that the term "volatility" is a double-edged
sword. </DIV>
<DIV> </DIV>
<DIV>a. Volatility SHOULD increase if prices go down because of the froth
created by the tug of war between demand/support and supply/resistance in
what is essentially an upward biased equity market in the US.</DIV>
<DIV> </DIV>
<DIV><FONT color=#000000>b. Volatility OFTEN ALSO INCREASES as the market moves
up after making some important bottom and people start flocking into it on the
buy side faster than supply can keep up - probably just because the market is
going up and fear of froth or decline subsides.</FONT></DIV>
<DIV> </DIV>
<DIV><FONT color=#000000>Therefore the use of</FONT></DIV>
<DIV><FONT color=#000000></FONT> </DIV>
<DIV>a. Static, pre-conceived VIX levels to trigger buy/sell based on historic
VIX levels where the market behaved in ABC/XYZ ways; or</DIV>
<DIV><FONT color=#000000>b. Higher-than-normal relative volatility as a sign of
market top (or lower than normal volatility for mkt bottom)</FONT></DIV>
<DIV><FONT color=#000000></FONT> </DIV>
<DIV>is dangerous; especially at "flash-points" of the past.</DIV>
<DIV> </DIV>
<DIV>Unlike traditional support/resistance levels measured on price, volatility
and Vix are an indicator of sentiment - which, is very difficult to quantify -
due to the </DIV>
<DIV> </DIV>
<DIV>a. collective psychographical* makeup of market participants at a single
point of time, AND</DIV>
<DIV>b. changes in the Market Participant "components" themselves
across a longitudinal time frame.</DIV>
<DIV> </DIV>
<DIV><FONT color=#000000>e.g.</FONT>: US individuals, foreign individuals,
foreign govt., MFs, US govt. institutions, hedge funds, specs, index funds, etc
etc - all dynamically increasing or decreasing their "market share"
AND all bringing a different psychographical profile to the table which doesn't
stay constant.</DIV>
<DIV> </DIV>
<DIV><FONT color=#000000>*Psychographical is a market segmentation term that
combines the meanings of "demographic" (age/income etc) and
"psychological" (behavioral response to internal/external stimuli;
why/what if etc) into one convenient word.</FONT></DIV>
<DIV><FONT color=#000000></FONT> </DIV>
<DIV><FONT color=#000000>The attached chart plots OEX daily since June 1986 in
yellow, and a "running-100-day" historical volatility calculation for
the OEX itself. </FONT></DIV>
<DIV><FONT color=#000000></FONT> </DIV>
<DIV>The objective of the chart is to illustrate the above conceptual points
graphically - there has been, in the last 12 years, something for
everybody:</DIV>
<DIV> </DIV>
<DIV>a. Mkt going DOWN after periods of increased relative volatility.</DIV>
<DIV>b. Mkt going UP during periods of declining relative volatility.</DIV>
<DIV>c. Mkt going UP during periods of increased relative volatility.</DIV>
<DIV> </DIV>
<DIV>a and b confirm the traditional school of thought re direction and
volatility, but breaks down the "static Vix levels" or similar
arguments.</DIV>
<DIV> </DIV>
<DIV>c injects the "double edged" component, collectively supporting
the view that we have not yet learned to build predictive value into sentiments
that affect price performance or predictability in the US equity market.</DIV>
<DIV> </DIV>
<DIV><FONT color=#000000>"c" can also be verified (charts not
shown) by computing bull/bear mkt volatility performance of commodities or
equities where no Vix data is available as a reference tool... </FONT></DIV>
<DIV> </DIV>
<DIV>The next email (and chart) will show how Sheldon Natenberg, Larry Connors,
Don Fishback (of ODDS Probability Cones fame) through their various published
books have illustrated how the underlying's volatility can be used to pinpoint
imminent short term volatility explosions (the phenomenon referred to as
"mean reversion") and profitable options/futures trading for virtually
any security. Option traders recognize this as "volatility trading",
which typically is direction-neutral for that short term.</DIV>
<DIV> </DIV>
<DIV><FONT color=#000000>Regards</FONT></DIV>
<DIV><FONT color=#000000>Gitanshu</FONT></DIV></BODY></HTML>
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