econintersect.com
  • 토토사이트
    • 카지노사이트
    • 도박사이트
    • 룰렛 사이트
    • 라이브카지노
    • 바카라사이트
    • 안전카지노
  • 경제
  • 파이낸스
  • 정치
  • 투자
No Result
View All Result
  • 토토사이트
    • 카지노사이트
    • 도박사이트
    • 룰렛 사이트
    • 라이브카지노
    • 바카라사이트
    • 안전카지노
  • 경제
  • 파이낸스
  • 정치
  • 투자
No Result
View All Result
econintersect.com
No Result
View All Result

What the $VIX is Telling Investors

admin by admin
7월 12, 2011
in 미분류
0
0
SHARES
0
VIEWS

Money Morning Investing Article of the Week Stock-Market-Wild-Chart
by Shah Gilani, Contributing Editor, Money Morning

Original Title: The Stock Market Volatility Index: What the VIX is Telling Investors

In the early ‘80s, when I was running a hedge fund from the floor of the Chicago Board of Options Exchange (CBOE), I was a market maker in OEX options. The OEX is the Standard & Poor’s 100 Index. The CBOE Market Volatility Index (VIX) was born from trading options on the OEX and from our desire to more accurately price risk.  The stock market volatility index (VIX) – or “fear gauge,” as it’s often called – has been giving off unexpectedly low readings in 2011.  But don’t be fooled, things aren’t what they seem.

Structural dynamics are currently suppressing the VIX, and are diminishing its predictive power.

If you want to trade this as a speculative investment – or even if you just want to use the VIX to better hedge your portfolio holdings – you need to understand the forces that are working on this stock market volatility index.

Let me explain …

I Was There for the Birth of the VIX

Back during my hedge-fund days, we used Monchik-Weber machines with their built-in Black-Scholes options pricing formula to help us mathematically measure put and call-option values. The computers would provide us with the theoretical value of the options we were trading.

But it wasn’t long before a gap between those theoretical values and the actual market prices drove us to find a different way to measure volatility. To calculate “implied volatility” – the estimated volatility extracted directly from bids, offers and actual prices – we looked at real-time prices as opposed to theory.

Simply put, based on actual prices for calls and puts on the OEX, we separated out implied volatility and used it as a measure of what traders were expecting to happen.

This volatility measure is the expectation of price movement over the next 30 days. The higher the reading, the more likely stocks are to move in one direction or another.

Over time, our volatility index became known as the VIX. And eventually, the VIX – not the OEX – became a measure of options-pricing volatility based on the Standard & Poor’s 500 Index.

The VIX is called the “fear gauge” for a good reason: As that index rises, it’s basically telling us that traders and investors are paying a greater premium to buy options, mostly because they are “paying up” to buy puts.

The Stock Market Volatility Index: What’s at Work?

I’m often asked this question: If there’s fear in the marketplace – and traders are buying puts and their prices are increasing, and they are selling calls and their prices are decreasing – why don’t the two cancel each other out and the VIX react less dramatically?

That’s a great question.

And the answer comes in two parts.

First, “selling calls” is a hedge against falling stock prices. But when you sell calls against a position you hold, you only collect the “premium” or payment that you sold the calls for. No matter how far the stock falls, your downside protection is limited to the money that you collected for selling the calls, meaning this hedge has limited value.

On the other hand, by “buying puts,” you can hedge or profit from a steep-and-lengthy drop in the price of the underlying stock. Even more important, in a sell-off or outright panic, investors and traders are more inclined to buy puts as protection or as a speculative position without too much concern for the prices they have to pay. That’s why volatility spikes in fearful markets.

That brings us to the current situation. I think we’d all agree that there’s been an awful lot of fear in the markets of late. And yet the stock market volatility index – the VIX – has remained stubbornly below (often well below) its historical norm of about 21.

So just what’s going on here?

Going by these low VIX readings, investors and traders have been shrugging off a whole host of negatives that are hanging over the stock market. Bullish investors would have us believe that stock prices are very effectively climbing the proverbial “wall of worry,” meaning “the market” sees good times ahead for stocks.

That may be true. But there’s also more to the story.

The Rest of the Story

Before the markets reached recent highs this past spring, investors and traders began protecting accumulated profits by selling calls against their holdings. I’m not just talking about individual investors; I’m talking about institutional players, too.

At the time, all sorts of potential market “headwinds” were grabbing headlines – everything from the twin tragedies (earthquake/tsunami and nuclear disaster) in Japan, inflationary fears and the approaching end to QE2 here in the United States, soaring oil and commodity prices, and the convulsions in the Middle East, to name just a few.

What we saw was that put buying was met head-on by even-more-robust call selling. So while the buying of protective puts should have lifted the VIX, a steady stream of call selling was offsetting what would otherwise have been generally widening premiums.

The more the markets digested the bad-news headwinds and the higher stocks edged, the less put-option prices were being bid up. What’s more, as things have quickly settled, call sellers have added to the downward direction of the stock market volatility index.

But there are larger, more-important structural dynamics working to keep the VIX low.

For one thing, the so-called “reach for yield” in a very-low-interest-rate environment is causing investors – and especially institutions – to sell calls against stock holdings in order to generate income.

Demographics are playing a role, too. Baby boomers have started to retire. As boomers age, they are switching from stocks to fixed-income investments, which reduces the demand for put protection as they unwind their equity holdings.

Hedging and Speculation Strategies

The real question to ask is: So where do we go from here?

It remains to be seen whether the selling of calls for income is a statement that investors believe the market has limited upside. If so, that would mean that they’re willing to trade away the small chance that there will be a substantial increase in stock prices in return for a boost in their income.

It also remains to be seen whether a low VIX means that the premium options sell for is lower, making it necessary to sell more options to garner additional income. If that’s the case, the lower level of this stock market volatility index would be structural, and thus self-sustaining.

But it’s also possible that a terrible danger is lurking behind these low VIX readings. And that’s something you need to beware of: Just because it appears as if the markets have adjusted to all these headwinds and haven’t corrected meaningfully doesn’t mean that they won’t.

That brings us to hedging and speculation strategies.

In terms of hedging, what I can tell you is this: The low VIX creates an excellent opportunity for you to buy put protection at reasonable prices. In the face of future unknowns, and as long as implied volatility is low, you should take advantage of cheap puts to add some portfolio protection … just in case.

For traders of the VIX, holding positions for big moves is out of fashion and foolish. Until the VIX stops trading in narrow bands, traders should take smaller profits and be quicker on the trigger when their trades are in the black. They can always keep a deep out-of-the-money position in calls if they want a longer-term, investment-type play.

Although the VIX is a stock market volatility index, traders and investors need to understand that it’s really no different than any other investment instrument – meaning that it, too, is vulnerable to structural changes and the dynamics of constantly moving market expectations. You should always understand what’s going on with the instruments you invest in and trade … and avoid at all costs getting blindsided by moves that you could have anticipated.

Editor’s note: GEI Investing will be posting a selected article on investing each week, hereafter on Monday, from the previous week posts at the Investing News, Analysis and Commentary website Money Morning.


Related Article

Why the $VIX Isn’t Surging by Albertarocks


More Outstanding Articles from Money Morning

Merger Mania Returns to Natural Gas

Why the U.S. Should Return to the Gold Standard – Even Though it Won’t

Prices for Rare Earth Metals Will Continue to Soar with China’s Monopoly Contract

The Debt-Ceiling Debate:  Three Federal Tax Increases That Could Save the U.S. Economy

Team Bernanke’s QE17:  A Glimpse of America in 2015

 


 

Previous Post

The Mortgage Fraud Whitewash is Nearing Completion

Next Post

June 2011 FOMC Meeting Minutes Has Dour Feel

Related Posts

Bitcoin Is Finally Trading Perfectly Like 'Digital Gold'
Economics

Bitcoin Is Finally Trading Perfectly Like ‘Digital Gold’

by admin
Namibia Will Regulate And Not Ban Crypto With New Law
Finance

Namibia Will Regulate And Not Ban Crypto With New Law

by admin
6,746 ETH Valued At $12M Was Just Burned
Economics

6,746 ETH Valued At $12M Was Just Burned

by admin
Bitcoin Is Steady Above $29,000 Awaiting US NFP Figures
Economics

Bitcoin: What Next After Consolidation Ends?

by admin
US Government Offloads Another 8,200 Bitcoin – On-chain Data
Economics

US Government Offloads Another 8,200 Bitcoin – On-chain Data

by admin
Next Post

June 2011 FOMC Meeting Minutes Has Dour Feel

답글 남기기 응답 취소

이메일 주소는 공개되지 않습니다. 필수 필드는 *로 표시됩니다

Browse by Category

  • Business
  • Econ Intersect News
  • Economics
  • Finance
  • Politics
  • Uncategorized

Browse by Tags

adoption altcoins bank banking banks Binance Bitcoin Bitcoin market blockchain BTC BTC price business China crypto crypto adoption cryptocurrency crypto exchange crypto market crypto regulation decentralized finance DeFi Elon Musk ETH Ethereum Europe Federal Reserve finance FTX inflation investment market analysis Metaverse NFT nonfungible tokens oil market price analysis recession regulation Russia stock market technology Tesla the UK the US Twitter

Categories

  • Business
  • Econ Intersect News
  • Economics
  • Finance
  • Politics
  • Uncategorized

© Copyright 2024 EconIntersect

No Result
View All Result
  • 토토사이트
    • 카지노사이트
    • 도박사이트
    • 룰렛 사이트
    • 라이브카지노
    • 바카라사이트
    • 안전카지노
  • 경제
  • 파이낸스
  • 정치
  • 투자

© Copyright 2024 EconIntersect