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arwen not claiming to be knowledgeable on VIX this is the way i see it. VIX is something to watch and think about not as an investment vehicle to invest in or against. When VIX is up Option traders are buying and selling more options which means there is more fear and anxiety which may be a good time to buy. On the other hand when VIX is low (like now) when investors showing less fear might be a time to sell.
I only answered because those more knowledgeable chose not to. Anyone else?
That is a fair way to say it since essentially it is a contrarian indicator. The only good way to speculate (on) or hedge with the VIX is in the futres itself. The ETPs out there are only useful for a day trade or swing trade. However, that also means those ETPs can provide a useful short term hedge around event dates.
"When VIX is up Option traders are buying and selling more options "
My experience is when the VIX is high, volatility is high which historically makes options more expensive. So the buyer of options(longs) are paying more for their options and have to overcome more of a price move in the direction of their play to be profitable if they hold to expiration. OTOH, if there is a slight move in the PPS their Long option becomes more valuable, more quickly than if volatility was lower and they can then sell for a profit.
The writer of options makes more in credit when volatility is higher and therefore has a greater probability of profit by OPEX than if the volatility was lower when the option was written.
The VIX is less of a reliable historical indicator for general market direction. For instance from Sept 2011 to Mar 2012 the DJI went up over 2000 points while the VIX went from 41 to 14. A second example is during the pre Tech crash of 2000(1996-1999). The exuberance of buying drove the VIX to one of its highs as the market traveled in tandem with it.
Two scenarios with the VIX going down, while the market went up in the first example and the second example, just the opposite with the VIX going up while the market went up with it.
The VIX is a recording of exuberant market activity, or the lack thereof. It simply is a barometer of the weather. Sure, upon fear and a sell off there will be an up tic in the VIX as we recently found at the end of Dec. because of the flurry of market activity. Those buying then made out well, today. That was not in itself a directional marker. We could have gone over the cliff and be at DJI 10,000 right now. Would those who bought on that "indicator" have had the same outcome? No. The VIX can be a cruel master. I like options and the VIX is a pretty steady friend to help to know when to Short Puts, as I did last month. It is less of a friend to those who play options on the VIX itself.
thanks, ...others chose not to respond because they probably thought ,, how the f did this idiot lose that on vix ? those where times i was all in and making a bundle on other trades, thought it would be a good hedge , it had worked out the first time.... then it didn't anymore and i leaned the lesson.
In conclusion, i agree with you , if i think the vix will rise i might as well sell long positions, it is just so hard to let go of any my long thought out dividend payers....but i know i i have positions i should get defnsive right now... just talking myself into it..
I did not read phils post closely enough. He actually has it stated backwards for the purpose of using the VIX as an indicator. Note while the VIX is cuurrently low indicating a complacency towards future volatility; that complancey is not being confirmed by other contrarian sentiment indicators such as AAII survey and Investor's Intelligence survey. Put/Call ratios were getting stretched on the Nasdaq and CBOE but not on the ICE. But recent action has backed those P/C ratios down and other momentum oscillators have been working back from overbought areas.