why is the VIX dropping?

Discussion in 'Options' started by marketsurfer, Jun 27, 2008.

  1. dmo

    dmo

    What the VIX measures DIRECTLY is the demand for options on the S&P 500 vs the supply of those options. In the most true sense, the VIX measures the "price" of those options.

    If demand for stocks in the S&P 500 rises relative to the supply of those stocks, what happens? The price of those stocks goes up, and so does the index which measures them - the S&P 500.

    Similarly, if the demand for options on the S&P 500 index rises relative to the supply of those options, what happens? The price of those options goes up, and so does the index which measures them - the VIX.

    The next question is: What causes the demand for these options to rise relative to the supply?

    The answer - as shown pretty convincingly by the charts I posted earlier - is "a drop in the S&P 500 causes the demand for those options to rise relative to their supply, and a rise in the S&P 500 causes the supply of those options to rise relative to their demand."

    The next step is to determine why people want to buy options when the S&P 500 drops, and sell options when the S&P 500 rises.

    I would argue that it's driven by emotion - fear and complacency. When stocks drop, people get nervous and are willing to spend a little more for insurance. When stocks rise, people breathe a sigh of relief.

    Others here have argued that it's driven by people's estimate of future volatility. To accept that premise you would have to believe that people's estimate of future volatility goes up each time stocks drop, and goes down each time stocks rise - on a minute-by-minute, tick-by-tick basis. That makes less sense to me than the "fear/complacency" theory.
     
    #51     Jun 29, 2008

  2. "hedge fund redemptions"--- what is your source ?

    thanks, surf
     
    #52     Jun 29, 2008
  3. look at diff components of the OEX 100
    Oils are almost on their year highs...so as vix goes up is a measurment "indirectly" of people hitting bids

    YES they are crushing bids in banks and airlines/ autos
    but on the other hand...look at the OIH today vs the OIH in Jan or March when we were free falling and the VIX spikeded

    LOOK at ALL TECH STOCKS (QQQQ) as well relatively speaking

    relatively speaking its MUCH MUCH higher

    same with the Ag's of the world,

    this is NOT A BROAD BASED SELLOFF

    once the GOOG's , RIG's, INTC's, POT;s have those big -5-10% down days...trust me...u'll see the VIX spike hard (and hopefully create a near term bottom)

    till then...slow painful grind

    just my thoughts

    d
     
    #53     Jun 29, 2008
  4. You can break surf’s article to two parts:
    1.De facto numbers ( what vix WAS a week/month/year ago)
    2.Future “predictions” based on current levels…a lot of maybes , ifs , “it could get worse “ and other unwarranted advises

    Nuff said
     
    #54     Jun 29, 2008
  5. nvl7

    nvl7

    Divergence between S&P and VIX is interesting. If you put the days when S&P and VIX were both up on the S&P chart, you’ll see that this divergence normally (not always) predicts downtrends – several days, or even weeks. Look at the dates, when S&P and VIX were both up:
    29/10/2007
    13/12/2007
    24/12/2007
    26/12/2007
    28/12/2007
    13/03/2008
    16/05/2008
    19/05/2008
    27/05/2008

    In bullish 2007 the divergence worked not so bright, but mainly it indicated next 2 - 4 bars down.
    May be it’s simply coincidence...
     
    #55     Jun 30, 2008
  6. dmo

    dmo

    Well, in bullish 2007 the VIX was mostly dragging along the "hard bottom" of 10%. So I think that distorted the relationship somewhat, as the VIX was not "free" to drop more as the S&P500 went up.
     
    #56     Jun 30, 2008
  7. nvl7

    nvl7

    24th and 27th June VIX and S&P were both down, will see soon, if the opposite works:)
     
    #57     Jun 30, 2008
  8. dmo

    dmo

    The VIX is looking a little lighter today, n'est-ce pas? None of that "heaviness" we saw Friday. Premium buyers are finally beginning to notice that the S&P is approaching major support.

    It's also crossed over the futures for the first time in some while, with the VIX now trading above the futures. Just a tiny little premium - nothing yet like what we saw at major bottoms in Jan. and March, when the VIX spiked up to 37% and the futures lagged way behind.

    My memory is that often there is a major market blowup shortly after the 4th of July. So it could get interesting.
     
    #58     Jul 1, 2008
  9. Looks like this scenario may happen unfortunately..
     
    #59     Jul 15, 2008
  10. iqfeed

    iqfeed DTN

    We just released the CBOE Futures Exchange (VIX futures) on DTN.IQ/IQFeed. We also added a few other futures exchanges recently based on feedback from users. For a list of available exchanges, please visit www.iqfeed.net.
     
    #60     Aug 13, 2008