VIX the Volatility or fear index

real time CNBC VIX price

The VIX "home" is considered to be 17 for many traders. Higher can be regarded as overly bearish and lower can be regarded as overly complacent.

Is VIX a Leading or a lagging indicator? I thought it moved faster than SPX. What is the most leading of indicators? thanks

Any data that is collected after the action is lagging, the only leading indicator is the imagination and projection based on historical data.

VIX is a trademarked ticker symbol for the Chicago Board Options Exchange Market Volatility Index, a popular measure of the implied volatility of S&P 500 index options. Often referred to as the fear index or the fear gauge, it represents one measure of the market's expectation of stock market volatility over the next 30 day period. The VIX is quoted in percentage points and translates, roughly, to the expected movement in the S&P 500 index over the next 30-day period, which is then annualized. For example, if the VIX is 15, this represents an expected annualized change of 15% over the next 30 days; thus one can infer that the index option markets expect the S&P 500 to move up or down 15%/√12 = 4.33% over the next 30-day period. That is, index options are priced with the assumption of a 68% likelihood (one standard deviation) that the magnitude of the change in the S&P 500 in 30-days will be less than 4.33% (up or down).

No company has provided a way of trading VIX directly. Instead a VIX trader must trade VIX futures and VIX futures suffer from time decay. As a result a 2x short term VIX futures ETF like Proshares UVXY will lose 80-90% of its value every 12 months. Proshares even state that their fund will eventually be worth zero. The odds of winning are so remote that it is questionable why such a fund exists or why they should call it an ETF. Most investors have not signed up to futures and options trading at their brokers yet that is exactly what they are doing when they buy Proshares UVXY, many without realising. Proshares also state that the SEC has not authorized their fund.

I came across a site called Volatility Research, which claims it can crack the volatility code. It reminded me of the guy who thinks that you can win at roulette by counting reds and blacks and waiting for runs. The only trend I have seen regarding volatility is the unrelenting time decay which suggests to me that the real winners are those that short VXX or use puts. Some traders believe that when the S&P500 and VXX both close negative there is a good chance that next day the SPX bounces higher.

Art Cashin: big VIX bet made. Feb 2013. Is this guy senile or???

http://www.businessinsider.com/art-cashin-on-big-vix-bet-2013-2

From this morning's Cashin's Comments (emphasis ours):

A Very Big Bet In A Somewhat Unlikely Instrument. My friend, Jim Brown, the ever-alert consummate professional over at Option Investor pointed us to a rather unusual trade. Here's what he wrote in last night's edition of his valuable newsletter:

In past years I have reported on trades that were so large it appeared someone had inside knowledge of a pending event. Sometimes those were massive put positions on the S&P. A new trade just appeared that suggests there will be a market event in the near future. Last week somebody put on a call spread on the VIX using the April 20 and 25 puts. They bought 150,000 contracts for a net of $75 per contract. That is an $11,250,000 bet that the VIX will move over 20 over the next 60 days. You would have to be VERY confident in your outlook to risk $11 million on a directional position with the VIX at five year lows and the markets trying to break out to new highs.

Since 1990, the VIX has risen an average of 2.9% on the Monday after options expiration. Looking at all five days of the week, the VIX has posted a mean daily increase of 0.16% since 1990. If you back out those Mondays following options expiration, however, the remaining increase is a mere 0.02% per day, meaning that these post-expiration Mondays have accounted for almost all of the cumulative upside movement in the VIX over the past 17 years.

VIX expiration dates

Here are some very useful tools for turning trading losses into gains:

A chart showing all the available VIX products:

After reading all this and you still want to trade VXX or UVXY here is some important information about when it is safer to trade them:

Over the last several months, the steepness of the VIX curve has driven extreme losses in VIX ETNs, which Cole called the “Kia” – for which you should read cheap ride — of volatility exposure.

“To hedge for six months or one year, with the VIX at five-year lows, you would have paid more this year than one day after Lehman went bankrupt,” he told conference goers. “Most people don’t realize that. The term structure is at the steepest level it has ever been in the story of markets over the last year.”

The VIX exchange-traded notes are “not inherently bad or good, they’re a tool, but not a very effective one,” he said. “I think the VIX ETNs offer exposure to volatility like driving a Kia — not a very good product, but they may get you where you need to go.”

Cole said he compared the merits of buying a VIX ETN versus commonly used options strategies. Result: “These VIX ETNs do not outperform a lot of traditional hedging strategies.” Buying a protective put option that is 10% “out of the money” worked better, as did being long a “straddle,” a multi-legged options strategy designed to profit from volatility. The volatility ETNs were the last-ranked among strategies he studied in terms of their efficacy in delivering volatility exposure.

One reason you should listen: Cole has been trading these things since these were launched on the exchange, and he knows the market inside and out. The more uninformed traders arrive in the market, the more opportunities for a fund like his. “Selfishly, I want as many idiots as possible in this market,” he said.

Where is Cole putting his money now? He’s betting against the crowd that has driven up the unprecedented cost of the long-dated futures. “I’m buying. It’s too cheap. Right now I’m buying the front month VIX future and selling the back.”