Volatility is a measure of how much fluctuation there is in the market. So, volatility by itself is directionless. Yet, VIX is low when stock market is bullish, high when stock market is bearish. This seems to suggest that VIX is dependent on the direction of the market, yet the definition of volatility is independent of direction. So, why is VIX low when market is bullish, high when market is bearish?
Because bull markets are less volatile than bear ones Daily range is much wider during uncertain time.
Vix is calculated based on the Implied Volatility of Calls and Puts, Puts usually have a higher implied volatility due to downmoves moving the market more than upward moves. Explanation is based on ppl running for the door when big downward moves are expected, thus ppl buy more Insurance, Option Prices go up, IV is derived from it. VIX=30 Day Average IV (loosley*), hence you get a higher VIX Move when the market fears a downward move.
Agreed... up like an escalator, down like an elevator. Effect of a bear market (relative to bull, of course) on the VIX is: - Faster price movements -> - Bigger gaps between prices -> - Larger standard deviations in prices -> - Wider gaps in interpolated prices -> - Higher VIX
There is a difference between statistical volatility and implied volatility and VIX is an index of implied volatility of SP500 options.
Not so much in stock, but i've seen it in other markets, it does happen the other way around too. Every now and then you will get a very VERY violent move to the upside where volatility does skyrocket. Not sure if the same would happen with VIX, but i would imagine so.
I'll tell you why. During gently ranging and slow uptrending markets selling doesn't really affect vol. This is because there is a strong bid (buy the dip) to sell into. But, when the market is downtrending, the guys buying the dip get force liquidated and so the buyers become sellers. This means there is sporadic and competitive attempts to take liquidity, thus more vol. The strong shorts start to take control and we all know that the pro shorts will run the market all over the board to induce buying. TL/DR When the bulls are in control and the shorts are scared, there is less vol. When the bears take control, the buyers get run over and so more vol.
there is a much more elegant explanation of why vol acts as it does, in certain regimes etc, depending on your level of technicality and expertise. cc here: http://www.math.columbia.edu/~smirnov/Derman.pdf for now, OP, just accept that it is as it is.