VIX Concerns and Accumulation/Distribution Correlations

[Timothy Clontz]

...for both the explanation and the kind words! :-)

I had always thought of the VIX dropping during a correction as a sign of complacency -- kind of contrarian.

But your post adds a whole new twist to it, because it could ALSO mean that options aren't being used to protect long positions... if those long positions THEMSELVES are being unloaded.

It seems to me that there might be a way to parse the difference between low VIX optimism (i.e. few options but plenty of long positions) versus low VIX pessimism (i.e. few options NEEDED because the long positions are being unloaded).

If a correction has a low VIX AND low market volume, that might be more optimistic for a bounce than a low VIX and high market volume because that would mean they aren't even bothering to keep the long positions and therefore don't have anything left they need to protect.

[Billy]

...for both the explanation and the kind words! :-)

I had always thought of the VIX dropping during a correction as a sign of complacency -- kind of contrarian.

But your post adds a whole new twist to it, because it could ALSO mean that options aren't being used to protect long positions... if those long positions THEMSELVES are being unloaded.

It seems to me that there might be a way to parse the difference between low VIX optimism (i.e. few options but plenty of long positions) versus low VIX pessimism (i.e. few options NEEDED because the long positions are being unloaded).

If a correction has a low VIX AND low market volume, that might be more optimistic for a bounce than a low VIX and high market volume because that would mean they aren't even bothering to keep the long positions and therefore don't have anything left they need to protect.

Exactly ! You found the perfect wording for what I was trying to convey. Now, it could even become worst than that if they are simply net short and hedging with calls rather than with puts since the VIX only tracks put options volatility.
And cheers for your baby!
Billy

[Timothy Clontz]

I think I understand the VIX a lot better now, and I appreciate it!

[pete]

Exactly ! You found the perfect wording for what I was trying to convey. Now, it could even become worst than that if they are simply net short and hedging with calls rather than with puts since the VIX only tracks put options volatility.
And cheers for your baby!
Billy

fascinating conclusion for whats going on under the surface, never seen it from that point of view.

as far as i got the VIX calculation, it uses both, nearterm puts and calls.
if net shorts would hedge with calls, then the call side should add to the calculation similar in VIX direction than puts for long protection, so the VIX should rise again?
am i missing here something on the put side?

[mnoel]

Here is a link leading to the VIX calculation. http://www.cboe.com/micro/vix/vixwhite.pdf

Thanks to all for these very valuable comments.

Regards,

Martin

[Billy]

fascinating conclusion for whats going on under the surface, never seen it from that point of view.

as far as i got the VIX calculation, it uses both, nearterm puts and calls.
if net shorts would hedge with calls, then the call side should add to the calculation similar in VIX direction than puts for long protection, so the VIX should rise again?
am i missing here something on the put side?

Pete,
You are right. I should have checked back the VIX calculation before writing the obviously wrong “VIX only tracks put options volatility”.
What I really had in mind was the usual interpretation of spikes in the VIX as being reflective of hedging of long positions in reaction to fear of a falling market by investors. Fear is pure emotion and then, yes it would be rational to interpret the VIX spikes as potential market bottoms. But such a widespread interpretation can prove totally wrong if under the hood the VIX spike is due to hedging of net short positions with calls. The “fear” would then lead to emotionally protecting from a rally and It could rationally mark a temporary top in a downtrend.
So, the current apathy in the VIX can mean an emotionally balanced market with as much fear of missing a new rally as of missing a new down leg. After all, isn’t Mr.Market the champion for fooling the most people most of the time?
Billy

[ilonaross]

http://www.zerohedge.com/news/2012-1...hing-red-alarm

Could this have any relevance?

[Billy]

http://www.zerohedge.com/news/2012-1...hing-red-alarm

Could this have any relevance?

Ilona,
Thank you but this has no direct relevance with VIX or institutional activity.
Billy

[pete]

Pete,
You are right. I should have checked back the VIX calculation before writing the obviously wrong “VIX only tracks put options volatility”.
What I really had in mind was the usual interpretation of spikes in the VIX as being reflective of hedging of long positions in reaction to fear of a falling market by investors. Fear is pure emotion and then, yes it would be rational to interpret the VIX spikes as potential market bottoms. But such a widespread interpretation can prove totally wrong if under the hood the VIX spike is due to hedging of net short positions with calls. The “fear” would then lead to emotionally protecting from a rally and It could rationally mark a temporary top in a downtrend.
So, the current apathy in the VIX can mean an emotionally balanced market with as much fear of missing a new rally as of missing a new down leg. After all, isn’t Mr.Market the champion for fooling the most people most of the time?
Billy

Billy,

looking around a little regarding volatility behaviour:

On a shortterm view i found larry connors vix 5% rule compared to the 10d SMA of VIX in his 2009 book.
If below 5% of the SMA, sell the S&P, good for 5 days and vice versa.

What i found pretty interesting was the behaviour in the period August-September 2011 in the Gold volatility GVZ, similar calculated to the VIX:
http://stockcharts.com/h-sc/ui?s=GLD...d=p32628808138

just a little food for thought

[Billy]

Billy,

looking around a little regarding volatility behaviour:

On a shortterm view i found larry connors vix 5% rule compared to the 10d SMA of VIX in his 2009 book.
If below 5% of the SMA, sell the S&P, good for 5 days and vice versa.

What i found pretty interesting was the behaviour in the period August-September 2011 in the Gold volatility GVZ, similar calculated to the VIX:
http://stockcharts.com/h-sc/ui?s=GLD...d=p32628808138

just a little food for thought

Pete,
Very interesting indeed. Your GVZ link seems to illustrate one of these cases of a “capitulation”” volatility spike at a top instead of at a bottom.
Billy