Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Are the Volatility Indices Valid?


The VIX has its moments.

A reader writes:

I have had troubles with the philosophy behind the family of "volatility" indices for quite some time, and I think I'm finally able to rationalize my concerns. It may be that this is an old argument, but the fact that the indices still exist, suggests to me that misinterpretation is always in the shadows.

These indices are a far cry from my definition of volatility. At best, I see these as "pessimism" indices, perhaps a semblance of downside volatility.

Volatility is a dual-edged blade. It slices in both directions. So volatility should be higher when there are large swings in either direction. Volatility should be lower when there are smaller swings in either direction.

Consequently, I struggle to understand how the volatility indices are a valid tool whose purpose is already served by the S&P 500.

Very much yes; I totally agree with the angle here. VIX in the very here and now, meaning this May, has added some value in that it's moved way beyond the bounds of what we've seen in the market so far. Take away the flash crash and we're off 8% or so from the highs in the SPX. That's a relatively tame correction given the persistent rally from last March into this April. The VIX however has rallied something like 220% in less than a month. And it's important to remember that at the time, a mid 15 VIX wasn't as dirt cheap as pundits had us believe. Realized volatility in SPX was about 7.

So what was the value add? Well, VIX certainly presaged this wave of fear. But that's more the exception than the rule. Most of the time the VIX does as the emailer says. You can glean the same info just watching the SPX. The VIX going up X% doesn't cause SPX to then go down Y%, rather it's a reflection of SPX going down Y%.

Again though, not in May 2010. The VIX is percolating and the market's not really crashing. There are two conflicting interpretations. One is that the VIX is predicting a crash, the other is that the fear needle has moved way too far too fast. Take your pick, but we won't know for sure until it hits the rearview.

Click Here to Read Adam Warner's "Trading Option Backspreads"
< Previous
  • 1
Next >
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Featured Videos