Volatility Tracker for the week of September 8, 2009
The biggest mover last week on the volatility front was gold, as the “gold VIX” (GVZ) closed 40% higher. [2,3] Recall that when equity index prices rise, implied volatility typically falls; this inverse relationship does not hold for gold and many other commodities. On the contrary, the volatility implied by option prices will often rise with commodity price increases -a state of affairs with significant implications for option traders. We are…
Volatility Tracker for the week of August 24, 2009
‘Reflation’ is the name of the conceptual cure for the cognitive dissonance experienced by any rational observer of this market. Equities returned to short-term overbought status this week [4] and options are relatively fairly priced [6]. At 16%, the 21-day realized volatility of the S&P 500 is as low as it’s been since the financial crisis began, though it would be folly to try to call a bottom in volatility, or…
Although the major equity indexes are highly correlated, they tend to diverge in meaningful ways on a day-to-day basis. The same is true for the implied volatility indexes that track equities. It’s also common for equities and implied volatility to move inversely on a daily basis – the expectation is that, most of the time, if the S&P 500 closes up, the VIX is likely to close down.
It’s very uncommon for both the equity indexes to all close higher…
I propose the following rule of thumb for VIX interpretation:
If you think some VIX movement entails a proposition p and movement in the other volatility indexes VXN, RVX, and VXD doesn’t entail p, you shouldn’t believe p.
Why accept this rule? Because equity indexes are highly correlated, especially over the very short term, and volatility indexes are calculated using the same methodology, such that in the case of a divergence of one volatility index from the others,…
Steven Sears in this weekend’s Striking Price is still on board the “Keep the VIX in perspective” train:
Stop obsessing about the VIX. The Chicago Board Options Exchange’s Market Volatility Index (VIX) is many things, just not all things. It can rise or fall for reasons that have more to do with trading type than market direction. During the week, some investors sold short-term hedges and bought long-term hedges. This exacerbated the VIX’s recent lows,…
Tuesday, September 8, 2009
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