InvestIdeas

16June09 - 208am +8GMT

wow.... VIX just did a gap up from its 3 months channel resistance.... if this is sustained, then we are looking at $VIX running to the tune of 1st resistance at ~33, followed by ~43... $VIX is currently at 30.88

To summarize, $VIX is commonly called the "Fear Indicator"... the higher this index registers, the more fearful is the market of a downturn in equities market. Simply read, VIX is inversely correlated to the Equities Indexes.

Ha Ha ... Thanks for creating this VIX thread. Very timely as we have discussions on the VIX in so many different threads.

33 is still a low number but this one can shoot up very quickly if there's a very strong catalyst.

Can anyone see a very strong catalyst out there ?

Does "complacency" or "this is too good to be true", qualify as a strong catalyst ?

I will be moving this thread into the "US" section to give it more visibility..

VIX
From Wikipedia, the free encyclopedia

VIX Index from inception to Oct. 2008VIX is the ticker symbol for the Chicago Board Options Exchange Volatility Index, a popular measure of the implied volatility of S&P 500 index options. A high value corresponds to a more volatile market and therefore more costly options, which can be used to defray risk from volatility.

[1] If investors see high risks of a change in prices, they require a greater premium to insure against such a change by selling options. Often referred to as the fear index, it represents one measure of the market's expectation of volatility over the next 30 day period.

http://en.wikipedia.org/wiki/VIX

Maybe he will be right this time ( and he has been so wrong the past few weeks ) ..

Another Ominous Sign for Stock Prices By Jeff Clark

The Volatility Index is pointing to another 1,000-point move.

The Volatility Index (aka the "VIX") is best used as a fear barometer. A rising VIX shows increasing fear among investors. It's commonly associated with declining stock prices. A falling VIX, on the other hand, indicates investors are less fearful and more willing to take risks. It often leads to rising stock prices.

The last time we looked at the volatility index, it was on the verge of breaking down through major support on the chart. We surmised that if Wall Street's fear barometer dropped below 39, it would kick off a 1,000-point rally in the Dow Jones Industrial Average.

The VIX did indeed break down, and the Dow – which was trading around 7,600 at the time – rallied as high as 8,800.

Today, the VIX is giving us another signal. This time, it's going in the other direction. Take a look...

Last week, the VIX broke out of a falling-wedge formation. It rallied up to resistance at 33 and then turned back to retest the breakout level. Now, it's on its way back up again.

If the Volatility Index can push above 33, it's a straight shot up to 39 – perhaps even as high as 46. Since a rising VIX indicates increasing levels of fear in the market, and increasing fear is typically caused by falling stock prices, this chart is a bad omen for the market over the next few weeks.

Of course, it's just one more bad sign in a sea of bad signs we've covered lately. This one, though, may be indicating a 1,000-point drop.

http://www.growthstockwire.com/archive/ ... jun_23.asp

VIX Below Lehman Bankruptcy Level Leaves ‘Wall of Worry’ Intact By Jeff Kearns

June 30 (Bloomberg) -- The drop in the Chicago Board Options Exchange Volatility Index below its level when Lehman Brothers Holdings Inc. collapsed leaves the benchmark gauge of U.S. options prices 26 percent above its average.

A four-month rally in equities pushed the VIX to 25.35 yesterday, down 37 percent for the year and giving it the first close below 25.66, the level before Lehman filed the biggest- ever bankruptcy on Sept. 15, 2008. The index has declined 69 percent from its record of 80.86 on Nov. 20, 2008.

Above-average volatility shows traders are still paying up for insurance to protect against losses in the Standard & Poor’s 500 Index. More gains depend on investors overcoming the remaining skepticism, sometimes called the “wall of worry,” spurred by last year’s 38 percent slump in the equity index, the steepest since 1937.

“It’s still elevated because people aren’t 100 percent sure this is all over,” said Stefen Choy, founder of Livevol Inc., a San Francisco-based provider of options market data and analytics. “Everyone is waiting because they know the worst is over, but they don’t know how fast the recovery is going to be.”

The VIX slipped 2.2 percent to 25.35 yesterday. The S&P 500 added 0.9 percent to 927.23, extending its best quarterly advance since 1998, as energy producers gained with the price of oil. The benchmark index for U.S. equities has climbed 37 percent from a 12-year low on March 9 on speculation that the first global contraction since World War II is easing.

Signs of Recovery

In the U.S., the Conference Board’s measure of leading economic indicators increased in April for the first time since June 2008 and rose again last month. Analysts covering S&P 500 companies boosted 2009 profit estimates for the first time this year in May, weekly data compiled by Bloomberg show.

Lehman, once the fourth-largest U.S. securities firm, filed the largest bankruptcy in U.S. history on Sept. 15, prompting a freeze in credit markets. The VIX surged 24 percent to 31.70 that day.

The VIX averaged 20.18 in its history stretching back to the start of 1990 before yesterday. After peaking in November, it dipped below 30 in May for the first time in eight months. The index reached an intraday record of 89.53 on Oct. 24.

The stock market has slumped in the past when the VIX traded at this level. It closed at 25.95 on June 15, 1998. The S&P 500 retreated 11 percent in the next 2 1/2 months as Russia’s debt default and Long-Term Capital Management’s failure caused losses at financial firms. The VIX stood at 25.47 on March 30, 2000, as the Internet bubble was bursting in a collapse that erased 49 percent from the benchmark index for U.S. stocks through October 2002.

Smaller Swings

The VIX is also dropping because stock-market swings are decreasing, which means dealers aren’t able to charge as much for contracts. Twenty-day historic volatility, a gauge of past price swings, for the S&P 500 has declined from this year’s peak of 50.36 on March 24 to a nearly 10-month low of 19.61.

“Option market makers have to maintain option prices at a level that reflects the actual volatility of the market,” said Dan Hutchinson, head of derivatives at Meridian Equity Partners Inc. in New York.

In February, Congress approved a $787 billion economic stimulus plan to help jump start growth and end the longest recession since World War II.

Federal Reserve Chairman Ben S. Bernanke has made unprecedented use of the central bank’s powers as the lender of last resort. He kept banks liquid by accepting bonds they can’t trade as collateral for Treasuries and bailed out the nation’s biggest insurer, American International Group Inc.

“Fear of the doomsday scenario has definitely subsided,” said Jeremy Wien, a VIX options trader at Societe Generale SA in New York. “Given the steps the government has taken and the decrease in huge market swings, it’s entirely reasonable for the VIX to drop to these levels and possibly even lower.”

Source: Bloomberg

AN EXTRAORDINARY DECLINE IN VOLATILITY by Brian Hunt, Daily Wealth

It's just like 2007 again... at least for volatility's sake.

Late last year, Wall Street's popular measure of investor fear – the Volatility Index, or "VIX" – skyrocketed to record highs. The VIX measures the price investors are willing to pay for protective options... the price they're willing to pay for insurance.

For much of the past five years, the VIX bobbed around the sleepy 20 level, which indicated folks saw blue skies ahead for stocks, bonds, and commodities. The great asset crash of 2008 caused the VIX to soar to 40... then to 50... then to 60... then to an astounding "we're scared to death" reading of 80.

But as you can see from today's chart, investors are getting comfortable again... the VIX has receded into the mid-20s. It's an extraordinary decline in just seven months. Most investors see blue skies ahead again. If there's a blip in the government's giant cap and trade boondoggle or the unprecedented "funny money" experiment, those skies will turn black in a hurry...

Source: Daily Wealth

ok ...for everyone's benefit ...

VIX as we see it now at 26.22... let's just round it off at 26...

this is the annual implied volatility (if i am not wrong) of sp500 selected bunch of at-the-money options...

so, suppose, my trade horizon is 1 month...obviously, i am only keen on knowing what this annual IV converts to... how this is calculated is like this..

26 / squareroot of 12 = 7.5%...

so, theoretically, SPX has a 66% of remaining within +/- 7.5% of its current range... ie 992 - 853 within the next ~20 trading days

to calculate Daily IV...do this...

Annual IV / 16 (which is squareroot of 256 (reason is that there are ~ 256 trading days in a year))

therefore, there is a 66% daily fluctuation for SPX is expected to be between 908 - 938 and a 95% chance it will be 2 x the standard deviation ..meaning 2 x 1.625% range swing...or 99% of a 3 x standard deviation swing...

there's never a 100% chance of anything in investment...so, that 1% is reserved for failed trades, representing the ever possible 1% losing trades...

banks manage that last 1% diligently...this happens very infrequently, but statistically, it happens...and so, the take away from this post is this...

NEVER commit 100% of your capital in any one trade...becos if you trade 100 times, you will at least lose once...and if all capital is always committed...this is termed as Risk of Ruin....

good luck everyone...

by Aspellian » Fri Jul 17, 2009 11:00 am

Extracted this from http://en.wikipedia.org/wiki/VIX

Although the VIX is often called the "fear index," a high VIX is not necessarily bearish for stocks. Instead, the VIX is a measure of fear of volatility in either direction, including to the upside. In practical terms, when investors anticipate large upside volatility, they are unwilling to sell upside "call" stock options unless they receive a large premium.

Option buyers will be willing to pay such high premiums only if similarly anticipating a large upside move. The resulting aggregate of increases in upside stock option "call" prices raises the VIX just as does the aggregate growth in downside stock "put" option premiums that occurs when option buyers and sellers anticipate a likely sharp move to the downside.

When the market is believed as likely to soar as to plummet, writing any option that will cost the writer in the event of a sudden large move in either direction may look equally risky. Hence high VIX readings mean investors see significant risk that the market will move sharply, whether downward or upward.

The highest VIX readings occur when investors anticipate that huge moves in either direction are likely. Only when investors perceive neither significant downside risk nor significant upside potential will the VIX be low.

VIX’s Gain Signals Risk Rally Doubt, Commerzbank Says (Update1) By Justin Carrigan and Matthew Brown

July 31 (Bloomberg) -- Gains in the Chicago Board Options Exchange Volatility Index, or VIX, may signal investor skepticism that the global rally in risk appetite will continue, Dresdner-Commerzbank said.

“The simple equation share prices equal risk perception is dangerous,” a team led by Ulrich Leuchtmann in Frankfurt wrote in a report today. The VIX “normally falls when prices are rising. The fact that that wasn’t the case can be interpreted as a signal that markets are increasingly doubting whether the current stock-market performance will last.”

The benchmark for U.S. stock options, also known as Wall Street’s fear gauge, is up 10 percent this week, even as the MSCI World Index of shares gained 1.5 percent. The VIX fell 0.8 percent to 25.4 yesterday.

The dollar has dropped 12 percent against the euro since March 4 during which time the MSCI World Index has rallied 44 percent.

“While dollar-yen remains at the mercy of stock-market performance, the relevance of this driver for euro-dollar seems to be weakening,” Leuchtmann said. “Despite strong stock- market performance yesterday, the dollar did not come under notable pressure against the euro.”

Source: Bloomberg

COMPLACENCY RETURNS TO THE STOCK MARKET by Brian Hunt

Volatility, we hardly knew ye.

Back in 2006, we pointed to depressed levels of the VIX as an excuse to buy cheap "portfolio insurance" against the likes of terrorist attacks and government-sponsored disasters.

The VIX measures the price investors are willing to pay for forms of portfolio insurance... so it's a great gauge of investor fear.

Back then, only the paranoid thought about home foreclosures, job losses, or market crashes. Nobody cared much about insurance. Which – as any good contrarian can tell you – is precisely the time you should buy some. The VIX sat at an "asleep at the wheel" level of 12.

Disaster hit in 2008... and sent the VIX to a "we're scared to death" level of 80. But as you can see from today's chart, complacency has returned to the market. The VIX has come down the mountain to reach 24. It's amazing proof that most investors have very short memories...

Source: Daily Wealth