@@yumchar7 The VIX, no I wouldn't use it that way. The VIX is very specific to only one thing and that is it's calculated based on S&P 500 Options. There isn't a whole lot of useful information in that measure. You'll definitely want to expand your volatility metrics to include the VIX futures complex, the cash vix term structure compared to each other, and several other metrics as well.
Everytime I watched your videos, you always have some great jokes in between your teaching and ending of your videos. Thank you very much for sharing your knowledge.
Glad you found value in it. I actually did a little update to it you can find here: ruclips.net/video/4EZljfSi18w/видео.html&ab_channel=VTS-BrentOsachoff
Yes, and you can actually make it even easier if you just round to 16. Just divide the VIX by 16 and that's a decent rough estimate at what the market is pricing in for Daily S&P 500 movement. A VIX of 16 implies approximately 1% per day movement in the S&P 500, up or down :)
@@VolatilityTradingStrategies oh that’s really cool! That can be very useful for me to get a rough idea what the implied move on a given day could be to set more realistic expectations.
Wow !! What A Great A- Z Easy Explanation Of The VIX Index, One Of You tubes Best Thanks A Million For Sharing This Informative Video, I Truly Gained Alot From It
Awesome info, thank you. The last question I want to get answered is how is the percentage for the Vix calculated. What data does it use to get to that number? I’m trying to understand those midday spikes and retracements on the vix too.
That can work as a general guide, but I would just add, remember the absolute values of the VIX dramatically change through different environments. So a 23 VIX in 2022 might mean something entirely different than a 22 VIX in 2017 :) Might I suggest you start using percentiles instead of absolute values: ruclips.net/video/V8_omeOX1Hs/видео.html&ab_channel=VTS-BrentOsachoff
You define the VIX as the standard deviation of the forward one-year expected movement of the S&P 500 based on a strip of S&P 500 options. However, when I Google what the VIX is, it states it is a real-time market index representing the market's expectations for volatility over the coming 30 days. Can you explain why these definitions have different periods? Thank you!
It's confusing sometimes but they are essentially saying the same thing. The VIX uses a strip of 30-day options for the calculation so it can be viewed as a 30 day forward expectancy. However, the VIX itself is an annualized value so when we say the VIX is 16, we actually mean 16% expected movement + or - over the next 1 year. So depending on where you get the definition from, it's kinda both. It's a 30-day volatility measure, annualized to 1 year, that can be broken down further into any time period we want by dividing by the square root of the time period. Fortunately, the VIX itself isn't that useful anyway so it's all just a semantics issue :)
@@VolatilityTradingStrategies Thanks! I did do some research about it and I now understand it's because of the nature of how volatility is computed (being the standard deviation of returns, log returns to be specific, it's the square root of variance). Thank you so much for this video!
Very informative video! I learned a lot. Would you ever do a video on this new ETF SVOL which implements a volatility trading strategy. I confess I don't understand what they're doing.
Yes, I do have a planned video series breaking down each volatility ETF and what it does, and I will get to SVOL in there when I'm done with the usual VXX UVXY etc. Personally I don't like any of the dynamic funds, I prefer to be my own risk manager and create my own volatility strategies. But yes I will get some videos out there on those
@@VolatilityTradingStrategies Yup. I can understand that you prefer to "roll your own". I'm loath to listen to anyone talking about covered calls. But the current returns on SVOL are so appealing I'm sure many people want to jump in without a clear understanding of the risks they're taking on.
@@Bob-ke9in The main issue I have with SVOL is people's general misunderstanding about dividends. They think they are making something when getting paid a dividend, but they aren't. That money is taken out of the price of the underlying. All that's happening is people are trading equity value for cash disbursement. So when you look at SVOL compared to something like SVXY, there is no outperformance, in fact it's worse. If a person held the same size in SVXY and adjusted it for the leverage factor, it would have been better long term and you could then just pay yourself a small income stream if you wanted. "Dividends" is one of the most misunderstood concepts in the investing world. For some reason, people think it's EXTRA money. It's not, and there's a lot of evidence to show that investing in securities that pay dividends is actually much lower return long-term. Also though, holding on to short volatility funds is a terrible long term strategy. Again, I think a person would be FAR better off long term using the SVXY within their own volatility strategy that rotates completely out of it and into cash during times of elevated fear. Those long calls on SVOL are not going to protect it, and investors would be far better off just not being short volatility during a crisis, rather than trying to find ways to hold on for the ride.
@@VolatilityTradingStrategies Thanks for the info Brent. I'm coming to see ETFs like SVOL as implementation of trading strategies which may or may not be effective in returning cash in the long run. The issue you raise with dividends is very interesting and one about which I've given some thought. If companies distribute cash in the form of dividends for which they have no profitable use then the company continues to grow at the same pace with or without the distributions. The company continues to grow and generate more dividends. Derivatives trading on the other hand is a zero sum endevor. Cash I receive selling calls come out of someone else's pocket. The object of the trading activity is to exploit any trading "edges". Nothing is created. I say this not to be critical of derivatives trading. Indeed I do a fair amount of it myself. But my chief focus is finding well run companies with the hope they will continue to grow in the future.
I was wondering the following things after watching your video: 1. The one year forward movement projected by the vix is just the one sigma range, correct? So this would imply a certain probability of the vix ending up within that range and it would imply the according probabilities to end up in the two sigma, three sigma, etc. range. Is my understanding right ? 2. Since the S&P500 cannot drop more than 100% within one year this would limit the vix to 100. According to my understanding the vix is derived from the ratio of puts and calls on the S&P500 which have 30 days to expire. If this ratio became extreme the vix could see even higher values, right? I think what limits the vix naturally is that people do not spend arbitrarily much money on hedging their positions. What do you think? Thank you for your great content !
1) Yes the VIX is showing within 1 standard deviation the expected forward return of the S&P 500, plus and minus. It's just a +/- estimate of forward expected vol within 1 SD. 2) The VIX is not limited to 100, it could go higher. The VIX is a statistical calculation off S&P 500 options activity, so that calculation could definitely go above 100, there's no ceiling to it. Now practically speaking of course it wouldn't make much sense if it was over 100, but the calculation could still get over 100. * Worth noting, the old VIX calculation was called VRO, and the old VRO would have had a closing value of 152 on Black Monday 1987, and an intraday value of 172. So yes, the VIX can technically go way higher than 100 :)
It's Vancouver, in a district called Coal Harbour. Very beautiful area since it's right on the ocean and there's a giant park there called Stanley Park. I guess you could say it's our Vancouver version of "Central Park" :)
Just found this channel and had been binge watching it. Love your content and already learnt so much in a day! Could you explain why for the forward expectation (09:30) the calculation is such that, VIX is divided by square root of the number of periods?
Great video! Is it possible to create your own VIX index based on another Index? I am currently writing my bachelors thesis about implied volatilities and would like to create something comparable to the VIX index on Swedish Index OMXS30? Do you know if it is possible to do so by using implied volatilities from continuous calls and puts and using the average implied volatility of the two? Thank you for the help! :)
Yes, definitely possible and I'd love to see that. What I would suggest, instead of trying to replicate something like the VIX which has numerous structural issues and of course the terrible SOQ settlement process, you may want to try to mimic something a little closer to the VOLI index instead. VOLI only uses at the money options so it's already a little more meaningful to practical trading, and it also uses the SPY ETF options market rather than the SPX index options that VIX uses. So all you really need is a Swedish index ETF with a liquid options market, and the methodology. I haven't dug into it but there may be a white-paper or prospectus on the Nations Index website that would be helpful in construction. nations.com/
It's just the way you can take an annualized value like the VIX and turn it into the time frame you want. If you want to take the annualized VIX index value and make it monthly, you have to divide by the square of 12. For daily (252 trading days) you divide by the square of 252.
VIX isn't a stock, but if you're question is are VIX options potentially a good place to focus your options trading on I would say yes. However, VIX is a very complicated instrument, it's much harder to trade than regular stocks and ETFs so you really should do a lot of research first, and it would also be a good idea to paper trade for a while so you don't get surprised by the VIX's unique characteristics.
Is there a theoretical maximum for the VIX? Upward move no I guess, but downwards? If I am not mistaken, then the VIX calculates from a monthly to an annualized. So if the monthly expectation is a 30% drop, that would give a VIX of 30*3.46=103.8, or an implied volatility of 103.8%. Is that correct?
The VIX is a 30-day forward volatility expectation, but it's annualized number. So a VIX of 20 implies an annual S&P 500 move of +/- 20%. There's no maximum for the VIX, it's based on S&P 500 options activity and that is an open market so technically there is no ceiling. But in a practical sense there are upper bounds where it would no longer make much sense. For example, had the VIX existed on Black Monday 1987 it would have been about 153. That's definitely in the upper bound of realistic prices. Above that could happen, a 200 VIX is possible, but I seriously doubt it, and it would only last for a day or two and then crash down hard. As to the minimum, for the same reason there are practical limits. For the VIX to get below 8 would require a truly astounding level of bizarre options activity. In every market there are buyers and sellers, so it's not like the VIX would ever go to zero or anything. The "reasonable" VIX high is around 100, that would be insane, and the low about 8, that would be equally insane.
Using square roots is how you take annualized values (which the VIX is) and view it over different time frames. Dividing by 12 mathematically just isn't accurate. The VIX uses monthly options, but it's an annualized value.
It's just the quickest way to take an annualized number and normalize it for different time periods. Divide by the square root of the period you're looking for. ruclips.net/video/4EZljfSi18w/видео.html&ab_channel=VTS-BrentOsachoff
If you go on the CBOE website you can get all the white papers and boring reading material you need. Warning though, it's very dry and probably not useful at all in actual trading. Knowing how the VIX is calculated isn't really something any trader needs. Now if you're interested (for whatever bizarre reason :) then go for it. CBOE website and enjoy your sleeping pills
What do you mean when you say return? This video just explains broadly how we can take an annualized VIX value and broadly convert it to different time frames as a rule of thumb
Thanks for explaining the VIX. One point I did not get, if the VIX measures the 1 year or even 1 month forward and the SP500 was down 9% in December it means that the VIX was 7% in November because if the measure was taken in December you are predicting 7% in January, are my analysis correct? Thank you! Again, nice video!
Well, it's best to consider the VIX a snapshot in time, so the value right now is what the forward 30 day implied volatility is. You don't really go back 30 days as in your example, it's in this moment. I see what you're getting at but no, it's best to view it as a right now indicator.
Excellent explanation! Thank you! What I don't understand is given that " it is a formula to derive expected volatility by averaging the weighted prices of out-of-the-money puts and calls, using options that expire in 16 and 44 days, respectively", how is it looking forward 1 year, instead of maybe average of 16 and 44 days? Is it because the implied volatility of the options is annual? Much appreciated! :)
This is a small point of confusion for people, but the VIX uses monthly options for the calculation but the number itself is annualized. So when we see VIX values of say 30, that's implying a forward 1 year expectation of 30% movement in the S&P 500 up or down, however that 30 is calculated based on options expiring 1 month out.
@@VolatilityTradingStrategies Thanks! I think no matter what option expiration you derive the volatility from, it is alway annual since the volatility input in black scholes is annual
Not sure I understand the question. Does what work? The VIX is a calculation only based on S&P 500 options. To see the VIX for other indexes you'd have to check that directly. So the Nasdaq for example has a VIX, the price of gold has a VIX, even some individual stocks like Apple and Google have a VIX calculation for them. But the actual VIX, is just the S&P 500 options market.
I see that historical put-call ratio data is available here: ycharts.com/indicators/cboe_spx_put_call_ratio. You'd want to see a smoother chart to really think there's predictive value, but I'm wondering if more data could reveal whether the VIX has a positive or negative bias at a given point by showing which side is driving the number.
Put call data is tough to work with because of how fast it can move, so this is why when I'm using my Extreme Put/Call ratio (or any other put/call data) I only use the extreme points as possible trade entries. Anything between the 10th and 90th percentile I just consider noise, and I don't really start to pay attention until we're within 5% or so of highs or lows.
Thanks for the Video. I’m super confused still. I’m thinking of buying the ‘S&P 500 VIX short-term futures 2.25x daily lev’ by wisdomtree. It says average hold of a day. Can I just hold it until the market drops or does it not work like that ? I’m thinking of putting 10 into it. It almost seems too good to be true to me? Does it cancel after a day ?
I don't mean any offense at all with this answer, trust me we all started in the same place. But if you're asking, it probably means you don't know enough about these ultra leveraged volatility ETPs to be investing in them. They are extremely fast moving products with a lot of complicated moving parts. I would recommend if you are going to be trading volatility ETPs, you keep everything to VXX and risk defined options until you have a very thorough understanding of what you're trading. I wouldn't ever touch the VIXL, but if you are going to, I'd hold off a long time until you fully understand the risks. It can cost you a lot of money very quickly if you're wrong.
The VIX is forward implied volatility, so if you compare that to the actual realized volatility of the S&P there will be a difference there. We call that difference the "Volatility Risk Premium" because traders need to be compensated for taking on future unknown risk. Realized vol can go above implied vol for shorter periods of time, but in general in the long term IV will have a higher average level than HV. It's the VRP
The square root of 12 is 3.46. So if you want to know what the VIX index value is implying for 1 month S&P 500 movement, you take the current VIX index and divide by 3.46. In that example, a VIX of 20, divided by the square root of 12 (3.46) = +/- 5.78%
That's an interesting comment! Can you give some examples of the advances you mean? Like zero commissions, easy access to platforms, options available to nearly everybody? I tend to think the biggest changes come from structural changes, such as adding weeklies, changing margin requirements, changing settlement time and method. But I'd be interested to hear what advances you think might be impacting it, and it what way
@@VolatilityTradingStrategies I’m a real rookie here, but it seems like time dependent tools and analysis methods might be strongly impacted by the ability to respond or react faster to market conditions. Also the ability to have more data available and even correlate data sets in new ways. This seems like very ripe ground for machine learning or deep learning technology to provide an edge to trading. I would think that retail trading is also having a larger impact. Great vid on the VIX btw. Super helpful. Cheers
All my videos are using the ThinkorSwim platform, I feel it looks the nicest for videos but honestly any software these days is going to have all the same basic functionality so anything will do. TOS looks nice though. As to how to plot charts, you can just go into the studies tab and do pretty much any metric you want on any time frame you set it to.
Also I am seeing an uptick before every presidential election! Is that a known phenomenon that traders bank on? There is clearly some seasonality there.
The problem is everything is already priced in and people are already hedged for whatever they think will happen in the next few weeks. So in order for volatility trades to profit from the election, something above and beyond what was already expected has to take place. So the traditional thinking is that there will be increased volatility at election, and maybe after if it's contested. So people immediately think, ok I'll buy long volatility for that. But in order for that to work out, volatility would have to spike above and beyond what is already priced in. And since the VIX and VVIX are above their 90th percentile, the market is already priced for some election fireworks as is. I see it as just as likely that volatility goes down after the election. So there really aren't any good trades to take in the last few weeks, because everyone who wanted to be hedged already is.
😆 I still don't understand this thing. It is always decaying; the market doesn't dictate the price; it represents the volatility of the future but doesn't match that number. It can also go bust, wtf
For lots more of my Volatility Trading info: www.volatilitytradingstrategies.com/volatility-dashboard
VIX went to 80 during the pandemic market plummet. Wdym much higher than it actually got?
Can the VIX signal when to buy or sell? e.g. Sell when VIX is around 30%, buy when it's at 20%?
@@yumchar7 The VIX, no I wouldn't use it that way. The VIX is very specific to only one thing and that is it's calculated based on S&P 500 Options. There isn't a whole lot of useful information in that measure. You'll definitely want to expand your volatility metrics to include the VIX futures complex, the cash vix term structure compared to each other, and several other metrics as well.
Everytime I watched your videos, you always have some great jokes in between your teaching and ending of your videos. Thank you very much for sharing your knowledge.
Wow. This was a simplistic yet monumental piece of information. Thank you sir.
Glad you found value in it. I actually did a little update to it you can find here:
ruclips.net/video/4EZljfSi18w/видео.html&ab_channel=VTS-BrentOsachoff
Thank you made this sound like a lot of sense it’s actually quite simple! Not as complex as people like to make it sound.
Yes, and you can actually make it even easier if you just round to 16. Just divide the VIX by 16 and that's a decent rough estimate at what the market is pricing in for Daily S&P 500 movement. A VIX of 16 implies approximately 1% per day movement in the S&P 500, up or down :)
@@VolatilityTradingStrategies oh that’s really cool! That can be very useful for me to get a rough idea what the implied move on a given day could be to set more realistic expectations.
Many thanks for the Light Bulb moment Brent . Been looking for an explanation like this for ages . ✌️
Wow !! What A Great A- Z Easy Explanation Of The VIX Index, One Of You tubes Best Thanks A Million For Sharing This Informative Video, I Truly Gained Alot From It
Thanks for the support, appreciate it!
Awesome info, thank you. The last question I want to get answered is how is the percentage for the Vix calculated. What data does it use to get to that number? I’m trying to understand those midday spikes and retracements on the vix too.
Not gonna lie, I would totally invite Brent Osachoff to a couple dinner parties.
Thanks! There's gotta be a few people out there who prefer to talk about the VIX than the weather right?
I’m inviting myself to that dinner party.
And he declines
Thank for your video.
I only buy stock when vix one month below 23.
Wii sale all when vix about 25.
And be patient wait and wait.
That can work as a general guide, but I would just add, remember the absolute values of the VIX dramatically change through different environments. So a 23 VIX in 2022 might mean something entirely different than a 22 VIX in 2017 :) Might I suggest you start using percentiles instead of absolute values: ruclips.net/video/V8_omeOX1Hs/видео.html&ab_channel=VTS-BrentOsachoff
can I use the Vix index in correlation with the US30?
You define the VIX as the standard deviation of the forward one-year expected movement of the S&P 500 based on a strip of S&P 500 options. However, when I Google what the VIX is, it states it is a real-time market index representing the market's expectations for volatility over the coming 30 days. Can you explain why these definitions have different periods? Thank you!
It's confusing sometimes but they are essentially saying the same thing. The VIX uses a strip of 30-day options for the calculation so it can be viewed as a 30 day forward expectancy. However, the VIX itself is an annualized value so when we say the VIX is 16, we actually mean 16% expected movement + or - over the next 1 year. So depending on where you get the definition from, it's kinda both. It's a 30-day volatility measure, annualized to 1 year, that can be broken down further into any time period we want by dividing by the square root of the time period.
Fortunately, the VIX itself isn't that useful anyway so it's all just a semantics issue :)
Why the square root for the calculation of forward expectations?
It's just a way to take the annualized value that the VIX is and view it in other time frames, days, months, etc.
@@VolatilityTradingStrategies Thanks! I did do some research about it and I now understand it's because of the nature of how volatility is computed (being the standard deviation of returns, log returns to be specific, it's the square root of variance).
Thank you so much for this video!
Very informative video! I learned a lot. Would you ever do a video on this new ETF SVOL which implements a volatility trading strategy. I confess I don't understand what they're doing.
Yes, I do have a planned video series breaking down each volatility ETF and what it does, and I will get to SVOL in there when I'm done with the usual VXX UVXY etc. Personally I don't like any of the dynamic funds, I prefer to be my own risk manager and create my own volatility strategies. But yes I will get some videos out there on those
@@VolatilityTradingStrategies Yup. I can understand that you prefer to "roll your own". I'm loath to listen to anyone talking about covered calls. But the current returns on SVOL are so appealing I'm sure many people want to jump in without a clear understanding of the risks they're taking on.
@@Bob-ke9in The main issue I have with SVOL is people's general misunderstanding about dividends. They think they are making something when getting paid a dividend, but they aren't. That money is taken out of the price of the underlying. All that's happening is people are trading equity value for cash disbursement. So when you look at SVOL compared to something like SVXY, there is no outperformance, in fact it's worse. If a person held the same size in SVXY and adjusted it for the leverage factor, it would have been better long term and you could then just pay yourself a small income stream if you wanted. "Dividends" is one of the most misunderstood concepts in the investing world. For some reason, people think it's EXTRA money. It's not, and there's a lot of evidence to show that investing in securities that pay dividends is actually much lower return long-term.
Also though, holding on to short volatility funds is a terrible long term strategy. Again, I think a person would be FAR better off long term using the SVXY within their own volatility strategy that rotates completely out of it and into cash during times of elevated fear. Those long calls on SVOL are not going to protect it, and investors would be far better off just not being short volatility during a crisis, rather than trying to find ways to hold on for the ride.
@@VolatilityTradingStrategies Thanks for the info Brent. I'm coming to see ETFs like SVOL as implementation of trading strategies which may or may not be effective in returning cash in the long run. The issue you raise with dividends is very interesting and one about which I've given some thought. If companies distribute cash in the form of dividends for which they have no profitable use then the company continues to grow at the same pace with or without the distributions. The company continues to grow and generate more dividends. Derivatives trading on the other hand is a zero sum endevor. Cash I receive selling calls come out of someone else's pocket. The object of the trading activity is to exploit any trading "edges". Nothing is created. I say this not to be critical of derivatives trading. Indeed I do a fair amount of it myself. But my chief focus is finding well run companies with the hope they will continue to grow in the future.
Excellent points. I will refer people to this when they ask..
I was wondering the following things after watching your video:
1. The one year forward movement projected by the vix is just the one sigma range, correct? So this would imply a certain probability of the vix ending up within that range and it would imply the according probabilities to end up in the two sigma, three sigma, etc. range. Is my understanding right ?
2. Since the S&P500 cannot drop more than 100% within one year this would limit the vix to 100. According to my understanding the vix is derived from the ratio of puts and calls on the S&P500 which have 30 days to expire. If this ratio became extreme the vix could see even higher values, right? I think what limits the vix naturally is that people do not spend arbitrarily much money on hedging their positions. What do you think?
Thank you for your great content !
1) Yes the VIX is showing within 1 standard deviation the expected forward return of the S&P 500, plus and minus. It's just a +/- estimate of forward expected vol within 1 SD.
2) The VIX is not limited to 100, it could go higher. The VIX is a statistical calculation off S&P 500 options activity, so that calculation could definitely go above 100, there's no ceiling to it. Now practically speaking of course it wouldn't make much sense if it was over 100, but the calculation could still get over 100.
* Worth noting, the old VIX calculation was called VRO, and the old VRO would have had a closing value of 152 on Black Monday 1987, and an intraday value of 172. So yes, the VIX can technically go way higher than 100 :)
@@VolatilityTradingStrategies Thank you
watching from Austria, loving it ;-)
TheFu1709ck thank you for the video. What ranges will be considered good, bad, or medium?
Excellent!!!
Very informative video thanks.
That is a great view! What is the name of the city? Thanks!
It's Vancouver, in a district called Coal Harbour. Very beautiful area since it's right on the ocean and there's a giant park there called Stanley Park. I guess you could say it's our Vancouver version of "Central Park" :)
Just found this channel and had been binge watching it. Love your content and already learnt so much in a day!
Could you explain why for the forward expectation (09:30) the calculation is such that, VIX is divided by square root of the number of periods?
Thanks so much! Let me know if you have any suggestions for future videos
Very nicely explained. Thanks.
Appreciate it!
Great explanation. Thanks!
Thank you so much for the great video!
Great video! Is it possible to create your own VIX index based on another Index? I am currently writing my bachelors thesis about implied volatilities and would like to create something comparable to the VIX index on Swedish Index OMXS30? Do you know if it is possible to do so by using implied volatilities from continuous calls and puts and using the average implied volatility of the two? Thank you for the help! :)
Yes, definitely possible and I'd love to see that. What I would suggest, instead of trying to replicate something like the VIX which has numerous structural issues and of course the terrible SOQ settlement process, you may want to try to mimic something a little closer to the VOLI index instead. VOLI only uses at the money options so it's already a little more meaningful to practical trading, and it also uses the SPY ETF options market rather than the SPX index options that VIX uses.
So all you really need is a Swedish index ETF with a liquid options market, and the methodology. I haven't dug into it but there may be a white-paper or prospectus on the Nations Index website that would be helpful in construction. nations.com/
@@VolatilityTradingStrategies Thank you so much for your help and the ideas! :)
@@saravikberg8864 did you make any progress with this? I want to try and do this but with a global equity and a global bond index.
nice layout and explanation 😎👍
Why do you use square root for shorter timeframes?
It's just the way you can take an annualized value like the VIX and turn it into the time frame you want. If you want to take the annualized VIX index value and make it monthly, you have to divide by the square of 12. For daily (252 trading days) you divide by the square of 252.
@@VolatilityTradingStrategies That I understand. I am interested in why do you use that formula. What is the explanation of using square root?
Is it smart to do stock options for this stock
VIX isn't a stock, but if you're question is are VIX options potentially a good place to focus your options trading on I would say yes. However, VIX is a very complicated instrument, it's much harder to trade than regular stocks and ETFs so you really should do a lot of research first, and it would also be a good idea to paper trade for a while so you don't get surprised by the VIX's unique characteristics.
Is there a theoretical maximum for the VIX? Upward move no I guess, but downwards?
If I am not mistaken, then the VIX calculates from a monthly to an annualized. So if the monthly expectation is a 30% drop, that would give a VIX of 30*3.46=103.8, or an implied volatility of 103.8%. Is that correct?
The VIX is a 30-day forward volatility expectation, but it's annualized number. So a VIX of 20 implies an annual S&P 500 move of +/- 20%. There's no maximum for the VIX, it's based on S&P 500 options activity and that is an open market so technically there is no ceiling. But in a practical sense there are upper bounds where it would no longer make much sense. For example, had the VIX existed on Black Monday 1987 it would have been about 153. That's definitely in the upper bound of realistic prices. Above that could happen, a 200 VIX is possible, but I seriously doubt it, and it would only last for a day or two and then crash down hard. As to the minimum, for the same reason there are practical limits. For the VIX to get below 8 would require a truly astounding level of bizarre options activity. In every market there are buyers and sellers, so it's not like the VIX would ever go to zero or anything. The "reasonable" VIX high is around 100, that would be insane, and the low about 8, that would be equally insane.
what's the purpose of using the square root? wouldn't you just divide the year into 12 to get the 1 month? why use the square root?
Using square roots is how you take annualized values (which the VIX is) and view it over different time frames. Dividing by 12 mathematically just isn't accurate. The VIX uses monthly options, but it's an annualized value.
@@VolatilityTradingStrategiesOkay thanks
Very informative. Thank you.
Great content
Oh man. I want to follow and I’m trying but this is so much more complex than just regular securities options math.
Why is it the square root?
It's just the quickest way to take an annualized number and normalize it for different time periods. Divide by the square root of the period you're looking for.
ruclips.net/video/4EZljfSi18w/видео.html&ab_channel=VTS-BrentOsachoff
Hey, nice explanation! Maybe you have any sources or materials about this calculation?
If you go on the CBOE website you can get all the white papers and boring reading material you need. Warning though, it's very dry and probably not useful at all in actual trading. Knowing how the VIX is calculated isn't really something any trader needs. Now if you're interested (for whatever bizarre reason :) then go for it. CBOE website and enjoy your sleeping pills
Thank you Brent
........suuuuuper view you have!
Looks like you are participating in the absurdly overpriced Vancouver RE market
Awesome explanation!
Monthly return is yearly return under 12th root, not devided by square root of 12...
What do you mean when you say return? This video just explains broadly how we can take an annualized VIX value and broadly convert it to different time frames as a rule of thumb
Good video, clever trader :]
Appreciate it!
Thanks for explaining the VIX. One point I did not get, if the VIX measures the 1 year or even 1 month forward and the SP500 was down 9% in December it means that the VIX was 7% in November because if the measure was taken in December you are predicting 7% in January, are my analysis correct? Thank you! Again, nice video!
Well, it's best to consider the VIX a snapshot in time, so the value right now is what the forward 30 day implied volatility is. You don't really go back 30 days as in your example, it's in this moment. I see what you're getting at but no, it's best to view it as a right now indicator.
Money Talk Thanks! Would mind making a video showing how you use the ATR tool?
Excellent explanation! Thank you! What I don't understand is given that " it is a formula to derive expected volatility by averaging the weighted prices of out-of-the-money puts and calls, using options that expire in 16 and 44 days, respectively", how is it looking forward 1 year, instead of maybe average of 16 and 44 days? Is it because the implied volatility of the options is annual? Much appreciated! :)
This is a small point of confusion for people, but the VIX uses monthly options for the calculation but the number itself is annualized. So when we see VIX values of say 30, that's implying a forward 1 year expectation of 30% movement in the S&P 500 up or down, however that 30 is calculated based on options expiring 1 month out.
@@VolatilityTradingStrategies Thanks! I think no matter what option expiration you derive the volatility from, it is alway annual since the volatility input in black scholes is annual
does it work for all indexex or just s&p
Not sure I understand the question. Does what work? The VIX is a calculation only based on S&P 500 options. To see the VIX for other indexes you'd have to check that directly. So the Nasdaq for example has a VIX, the price of gold has a VIX, even some individual stocks like Apple and Google have a VIX calculation for them. But the actual VIX, is just the S&P 500 options market.
thank you for this 👍🏽👍🏽
Thank you so much!
very helpful..
I see that historical put-call ratio data is available here: ycharts.com/indicators/cboe_spx_put_call_ratio. You'd want to see a smoother chart to really think there's predictive value, but I'm wondering if more data could reveal whether the VIX has a positive or negative bias at a given point by showing which side is driving the number.
Put call data is tough to work with because of how fast it can move, so this is why when I'm using my Extreme Put/Call ratio (or any other put/call data) I only use the extreme points as possible trade entries. Anything between the 10th and 90th percentile I just consider noise, and I don't really start to pay attention until we're within 5% or so of highs or lows.
Thanks for the Video. I’m super confused still. I’m thinking of buying the ‘S&P 500 VIX short-term futures 2.25x daily lev’ by wisdomtree. It says average hold of a day. Can I just hold it until the market drops or does it not work like that ? I’m thinking of putting 10 into it. It almost seems too good to be true to me? Does it cancel after a day ?
Say if I buy and the market goes up. Can I just wait till it goes down ? Or do I pay something, or does it get cancelled ?
I don't mean any offense at all with this answer, trust me we all started in the same place. But if you're asking, it probably means you don't know enough about these ultra leveraged volatility ETPs to be investing in them. They are extremely fast moving products with a lot of complicated moving parts. I would recommend if you are going to be trading volatility ETPs, you keep everything to VXX and risk defined options until you have a very thorough understanding of what you're trading. I wouldn't ever touch the VIXL, but if you are going to, I'd hold off a long time until you fully understand the risks. It can cost you a lot of money very quickly if you're wrong.
Thanks Brent! Why is there such a big difference between the average historical VIX value and the actual average historical movement of the S&P 500?
The VIX is forward implied volatility, so if you compare that to the actual realized volatility of the S&P there will be a difference there. We call that difference the "Volatility Risk Premium" because traders need to be compensated for taking on future unknown risk. Realized vol can go above implied vol for shorter periods of time, but in general in the long term IV will have a higher average level than HV. It's the VRP
Exactly the video I needed (liked).
Thanks for the support!
I do not understand it! how is 20/12 is 3.46?
The square root of 12 is 3.46. So if you want to know what the VIX index value is implying for 1 month S&P 500 movement, you take the current VIX index and divide by 3.46. In that example, a VIX of 20, divided by the square root of 12 (3.46) = +/- 5.78%
It is not muted... that's just one standard deviation.
Thanks!
I wonder how advances in online options trading has impacted the VIX
That's an interesting comment! Can you give some examples of the advances you mean? Like zero commissions, easy access to platforms, options available to nearly everybody? I tend to think the biggest changes come from structural changes, such as adding weeklies, changing margin requirements, changing settlement time and method. But I'd be interested to hear what advances you think might be impacting it, and it what way
@@VolatilityTradingStrategies I’m a real rookie here, but it seems like time dependent tools and analysis methods might be strongly impacted by the ability to respond or react faster to market conditions. Also the ability to have more data available and even correlate data sets in new ways. This seems like very ripe ground for machine learning or deep learning technology to provide an edge to trading. I would think that retail trading is also having a larger impact. Great vid on the VIX btw. Super helpful. Cheers
How does 1.26%/day = only 5.78% in 252 days?
It doesn't. The chart you're referring to says a VIX of 20 roughly implies moves of:
1.26% per day
2.77% per week
5.77% per month
20% per year
Which platform did you use to plot the 5 days chart and how exactly did you do it?
ASAP.
All my videos are using the ThinkorSwim platform, I feel it looks the nicest for videos but honestly any software these days is going to have all the same basic functionality so anything will do. TOS looks nice though. As to how to plot charts, you can just go into the studies tab and do pretty much any metric you want on any time frame you set it to.
Also I am seeing an uptick before every presidential election! Is that a known phenomenon that traders bank on? There is clearly some seasonality there.
The problem is everything is already priced in and people are already hedged for whatever they think will happen in the next few weeks. So in order for volatility trades to profit from the election, something above and beyond what was already expected has to take place. So the traditional thinking is that there will be increased volatility at election, and maybe after if it's contested. So people immediately think, ok I'll buy long volatility for that. But in order for that to work out, volatility would have to spike above and beyond what is already priced in. And since the VIX and VVIX are above their 90th percentile, the market is already priced for some election fireworks as is. I see it as just as likely that volatility goes down after the election. So there really aren't any good trades to take in the last few weeks, because everyone who wanted to be hedged already is.
@@VolatilityTradingStrategies Thank you that's helpful!
😆 I still don't understand this thing. It is always decaying; the market doesn't dictate the price; it represents the volatility of the future but doesn't match that number. It can also go bust, wtf
🤑🤑🤑
Deja Vu?
that looks familiar. coal harbour?
Good eye!