"I saw a lot of people possibly misinterpreting today's action in the
VIX. Primarily this is because very few people actually understand what
the VIX is or how it is calculated.
The phrase "fear index" is
used to describe the VIX, and while it is true that as the markets fall
the VIX will generally rise, the VIX calculation has nothing to do with
fear (obviously) and everything to do with how deep out of the money
option buyers are going. The part people forget is that it works both
ways. As the VIX bottoms and rises, people begin going deeper and deeper
out of the money on puts. As the VIX begins to peak, you see sizeable
acceleration in the VIX and option traders reverse and sell deeper out
of the money puts or buy deeper out of the money calls.
Therefore,
large spikes in the VIX like you saw today might have been people
loading up massively on out of the money calls, yet everyone is looking
at is as bearish. It is unfortunate that people don't understand the
VIX."
VIX. Primarily this is because very few people actually understand what
the VIX is or how it is calculated.
The phrase "fear index" is
used to describe the VIX, and while it is true that as the markets fall
the VIX will generally rise, the VIX calculation has nothing to do with
fear (obviously) and everything to do with how deep out of the money
option buyers are going. The part people forget is that it works both
ways. As the VIX bottoms and rises, people begin going deeper and deeper
out of the money on puts. As the VIX begins to peak, you see sizeable
acceleration in the VIX and option traders reverse and sell deeper out
of the money puts or buy deeper out of the money calls.
Therefore,
large spikes in the VIX like you saw today might have been people
loading up massively on out of the money calls, yet everyone is looking
at is as bearish. It is unfortunate that people don't understand the
VIX."
Many BEARS misinterpreted the VIX back in 2002/2003 suggesting a LOW VIX showed complacency, lack of fear...so they kept shorting. WELL I ASK YOU how will the market fall if there is a "lack of fear"? It is only when the VIX falls to very low levels and reverses into a rising TREND do you have this indicator telling you more and more traders are buying out of the money puts and swinging more cautious, pessimistic....increasing chances of a selloff.
Extreme readings like that in late 2008 of 80.....show sellers exhaustion and were precursors to forming a IT and LT bottom.
A break of 1295 area, we are HERE, would suggest the market is going to attack levels near or even its rally highs of 1370. Remember it doesn't matter what is going on in the REAL WORLD....until it does.
Duratek
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