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Due to limitations of the RT Listerver the attachments for this post are in
on successive posts.
I am afraid I have to disagree about the decoupling of VIX with the index.
The relationship is as tight as ever. The only thing that has changed is
the base level of volatiltiy. What a trader has to do to utilize it for
timing is compensate for the varying level over long periods of time. Jack
Karczewski addressed this in TASC April 1995 with his article "Modifying
The Volatlity Index(see attached MVI822 for daily chart, and see VIXid822
for intraday chart). At the end of the day the the MVI remained in dead
neutral on its center line. The MVI is a composite of the OEX and VIX and
is discussed in the TASC article. TS code is available on the RT website.
Ron McEwan approached the changing level another way, by using a
statistical measure he calls the VIX Zone score(see AMOS822 & OEX822
charts). Today the VIX Z score went into extremely oversold(+2 to +3) with
accompanying short and intermediate term components of the OEX dropping
into oversold and extremely oversold zones. The long term 90 day component
dropped from extremely overbought to overbought. A move above +2 std dev
and back under by the VIX Z score is a buy signal. This may or may not
occur in the same day. A strong intraday buy signal was generated on 8/22.
Whether this suffices for a buy signal on daily charts will be evident
next week if there is followthrough buy the OEX to the upside. The MVI
daily neutral reading, on the other hand, is more in agreement with the
other breadth nonconfirmations and valuation measures of the components of
the OEX. The jury is out on a continuation of the bull market or more of a
correction. As of Friday it says consolidation is the modus operandi.
From "The Risk Management Series 3" from the CBOE we have "The CBOE Market
Volatility Index(VIX) is constructed from the implied volatilities of the
eight near-the-money, nearby, and second nearby OEX option series. The
implied volatilities are weighted in such a manner that VIX represents the
implied volatility of a hypothetical thirty-calendar day
(twenty-two-trading day), at-the-money OEX option."
Bob Roeske
Momentum Cycles
http://www.oextrader.com
At 10:45 PM 8/22/97 -0500, you wrote:
>The question comes up all the time about what does the VIX really
>measure.
>
>Vix measures and exactly ATM...exactly 30 day option. Not a put not a
>call.
>
>Let me translate VIX into real numbers on the DOW aassuming the S & P
>100 and DOW correlate well.
>
>VIX close today at 26.71 the VIX year is 312 DAYS(BY the way this why
>most people can't back implied vol into the VIX...because it uses a
>short year it's measure is higher than the simpole implied vols of the
>components).
>
>The square root of 312(this is hoiw we arrive at a one day measure) is
>17.66. 26.71 VIX divided by 17.66 to normalize to a one day move is
>equal to 1.5(I'm rounding so everybody remain calm).
>
>Let's say the DOW is at 7900...with a VIX of 26.71 a typical 1 day rance
>would be expected to be 7900 X .015 = 118 points.
>
>The Dow should move +/- 118 points about 2/3 of the time so about 14 of
>the trading days a month. This is a +/- 1 std dev move. About 5% of
>the time the Dow should move(this would be 1 day month)about +/- 350
>points...YIKES !!!!!
>
>Remember implied vol is a consensus...it's kind of a garbage salad of
>everything in the refrig.
>
>Vol also is a measure of inability to hedgge so it should spike for
>moves approaching NYSE/CME collars. It should spike on down days
>because of the inability to obtain upticks..as well as the general trend
>to go up on down days. It should spike on the day prior to a non
>trading day...Fridays or days before holidays.
>
>I could go on for pages but I just wanted to post a general review.
>
>I did an interview with Bloomberg business news late this afternoon
>about VIX becausse we had the highest recorded reading this decade this
>afternoon and they wanted to understand the importance. They also
>wanted to undersstand why the traditional relationship between price
>movement annd volatility hadd decoupled...Vol up in up markets and Vol
>up in down markets and they were doing a survey about that as well. I'm
>actually anxious to see what the other folks in the industry had to say.
>
>One last point...intraday vol. is the highest continuous measure in
>recorded history. Not that a day or two days in history hadn't been
>higher...but a constant period of this(going on almost 300 calander
>days)has never occurred before.
>
>
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