"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.
Doc, I agree.
The old market saying is
"When the VIX is High its time to buy, When the VIX is Low its time to go."
Thats why calls will be much more expensive when the Vix is High and Puts will be expensive when The VIX is low.