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Just for what it is worth....the actual low wasn't in 1995/1996..there
were numerous lows(single digit VIX levels) in the late 80's and early
90's.
<P>nwinski wrote:
<BLOCKQUOTE TYPE=CITE>
<P>THE DOCTOR wrote:
<BLOCKQUOTE TYPE=CITE> I think VIX may actually be more of an "environmental"
market sentiment measure than just a mere measure of option premium.
I agree with many of the VIX posts to trade off VIX alone would be myopic.
I do believe, however, that the market moves through periods of a changing
environment.
<P>In the late 70's a VIX(had on existed)in the 30% may have been a "fair"
measure. In the early 90's 30% would have been obscene. In
fact the market may be much more volatile today than at any time in the
past.....too many reasons to post but IMHO it has lot to do with the huge
decline in transaction costs and the impact that individual investors now
have have on actual volatility.
<P>What would genuine be interesting might be to examine VIX from a historical
perspective. Not what the market did when VIX changed and draw a
historical persepective...because I don't believe we are comparing apples
to apples...BUT rather the spread between actual volatility and VIX and
draw a HISTORICAL perspective from that VIX.
<P>IMPLIED VOL..which is what VIX is calculated from is much much much
more than a pure mathematical concept...it is a sort of garbage salad of
beliefs....fears....views and most importantly a measure of the DIFFICULTY
OF OPTION TRADERS TO EFFECTIVELY COMPLETE THERE HEDGING ACTIVITIES and
that value is clearly the highest(most difficult)it has ever been..{again
IMHO this comes back to the proliferation of electronic trading systems}.
<P>Another important point is that obviously no one indicator will ever
allow any of us to mechanically turn off our TRADING BRAIN and just trade
and I know nobody implied that we do that.
<P>In my view VIX has always been a weather report on the forward market.
In the current environment I view a VIX of 18 - 20 % as a precursor to
a selloff. Yet I would view a VIX of 15 16
17 or lower as circumstance under which I would "bet the farm" personally.
Having said that a month from now I might view these VIX levels totally
differently. I would have absolutely viewed them differently even
just 2 years ago. I'm one of the folks who was shocked to see the
rally of 97 and the rally so far this year at VIX levels what they were.
Yet if I can find a tool that will help make me money I'll adapt in a heartbeat.
<P>Dear Gary, Doc, Sneezy, et al,</BLOCKQUOTE>
In the most recent issue of the NCGR
Magazine, Spring 1998, there is an excellent research article by Ken Gillman,
"Stations of the Moon", which supports a theory long held by me that the
volatility of the stock market is in part a function of the 18.6 year cycle
in Lunar Declination and the Lunar Nodes.This cycle would have correctly
forecasted the a high for VIX in 1987 and a low for VIX for 1995-96.
<BR>The long term trend for stock market volatility should now be in the
increase until about 2005.
<BR>
<BLOCKQUOTE TYPE=CITE>Volatily,</BLOCKQUOTE>
Norman
<BLOCKQUOTE TYPE=CITE>
<BLOCKQUOTE TYPE=CITE>On May 23, 7:48am, THE DOCTOR wrote:
<BR>> Subject: RE: MKT VIX LEVELS
<BR>> This week's Barrons has an article on VIX levels and what they may
mean to
<BR>> the market. When you get a chance go to "THE STRIKING PRICE"
column.
<BR>> You can read it online at www.interactive.wsj.com and I think there
first
<BR>> couple of weeks are still free or obviously you can just get Barrons
on the
<BR>> newsstand. The fellow quoted "Leon Gross" at SalomonSmithBarney
is
<BR>> probably the sharpest derivative analyst around. I steal from
Leon every
<BR>> chance I get.
<P>Leon points out that some major tops in the market have been made
<BR>recently when VIX dropped below 19. Since VIX tends to do drop
<BR>as the market is climbing (maybe due to less premium pressure
<BR>caused by buying puts), and 19-ish has been the low point, that's
<BR>not too surprising.
<P>However, I think artificially deciding on a level of VIX for buy/sell
<BR>doesn't work well. VIX traded down below 10 in late '94, early
'95.
<BR>Here's a recent chart, courtesy Yahoo! that shows VIX over the past
<BR>year, vs. the S&P 500:
<BR> http://quote.yahoo.com/q?s=^VIX&d=1ys
<BR>and the past 5 years:
<BR> http://quote.yahoo.com/q?s=^VIX&d=5ys
<P>--
<BR>| Gary Funck, Intrepid Technology, gary@xxxxxxxxxxxx, (650) 964-8135</BLOCKQUOTE>
</BLOCKQUOTE>
</BLOCKQUOTE>
</HTML>
</x-html>From ???@??? Tue May 26 18:08:36 1998
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Subject: Re: Volatility Thoughts 1/ Picture = thousand words
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X-To: Gitanshu Buch <onwingsofeagles@xxxxxxxxxxxxx>,
RealTraders Discussion Group <realtraders@xxxxxxxxxxxxxx>
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Gitanshu Buch wrote:
> >Is a picture worth a thousand words?
>
> With all due respect for the trade summary which showed a phenomenal
> win/loss ratio and ROI, this picture is not worth much to me.
I only had a short period of data to give being the markets were trading. So I have already done
extensive backtesting and know what it will do I only run 180 days in real time. I have sent you the
historical backtesting as far back as the vix history goes. BTW I have no interest in selling or
getting money out of anyone. I cant I am under contract to build systems for one person and that is
it. I receive a percentage of the profits for my work. I need to converse with other system
developers to get new ideas and that is why I post what I do. To stir up ideas, I took absolutely no
offense to anything you have written, each is a valid point and I will address each one of them
publicly.
> Because of the foll reasons:
>
> a.I don't understand conceptually or practically the point being made -
> other than seeing the SnP/VIX plots and the buy/sell arrows where
> essentially two good moves and one shaky move were caught from a total of 8
> trades.
I believe you are correct in your concern and hope that the longer testing results will at least
explain.
> b. The larger of the two significant moves caught - was also captured by any
> rudimentary system of capturing breakouts or trend/oscillation setups.
>
> What, then, is the edge being displayed here? I would imagine that in the
> examples shown, the edge came from money management and not necessarily from
> any interplay of VIX with SnP.
NO! The system uses no money management whatsoever! Each trade is placed only by the VIX. I am doing
something less than obvious, look hard.
> Here's the data from that chart as visually apparent to me:
>
> Trade 1: (12/9-12/18) Short ~ 1000, presumably covered ~ 965 = +35 points =
> Classified GOOD trade.
> Trade 2: (Just before 1/9) Long ~ 980, immediately a loser unless stopped
> out tight.
> Trade 3: (just after 1/9) Short ~ 970, maybe a 5 point gain =
> inconsequential since 5 points = 1/2 ATR these days.
> Trade 4: (just after 1/21) Long ~ 970, caught the mother of all moves from
> 970 to say 1120 (150 linear points, assuming all of it was captured).
>
> a. Trades 2,3,4 seem to be at the same price level, but completely different
> volatility levels; AND coming out of totally different volatility
> precedents.
As you may know when a system has a historical look back and this one does, it takes time for the
system data to shake out. I therefore having done extensive backtesting on this model tend to ignore
the early data on a chart because I am trading on the right side of the screen not the left. As you
know when a contract rolls over things look bad at the beginning of the contract and that is what
happened here. The first trades that you see probably didn't happen for real like they look on the
chart because of the thin data.
> b. There is inconsistency in the "rising vix/falling prices" logic within
> the period encompassing these 3 trades; because use of such logic would have
> captured more action than displayed.
>
> Hence some other decision rule must have been used for trade entry.
Think VIX oscillation not levels.
> General observation from displayed chart is that unless there is a sustained
> trend, the non-money management component of your decision rules seems to be
> capturing noise and getting whipsawed.
I like whipsaws it shakes out the weak traders in a market so I can get on with making money. I try
and trade above the noise so when it looks like I am capturing noise I actually am letting it have
some room to run.
> Also, there are profitable moves captured by using the charts displayed by
> BobR and me previously on RT; using vix as the primary trade driver, within
> the regions where your displayed system gets whipsawed.
I have a second system that I would be glad to publish that does not have the inherent lag or
whipsaw.
> Win-loss isn't anywhere near your number - but % profitable still gets there
> or better.
>
> Finally, TC - this is being sent privately and the criticism is intended to
> be constructive because I'm seriously trying to recognize the point your
> chart is making and learn from it - not inflammatory in intent.
Thank you for your comments and concerns and may we both learn from them. I certainly have
appreciated your hard work on the charts that you have posted and hope you will continue with this
tread. It is certainly one that I find stimulating to say the least.
>
>
> Regards
> Gitanshu
ps forgive me for posting this private email publicly. but i took no offense and believe others
may have wondered some of the same things as you.
--
TC
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