We continue to get questions regarding why the $VIX futures are priced as they are, and how one should interpret that information. This is a subject that we have discussed many times in the past, but it is probably worthwhile to review it again.
There are two significant pieces of data that one should always be aware of, when evaluating $VIX futures: 1) the relationship of the futures to $VIX itself,
The market action in the last 10 days has been a complete whipsaw. Now, the chart of the Standard & Poors 500 Index ($SPX) shows the index to be in a trading range -- bounded by resistance at 1880+ (the all-time highs) and support at 1840 (last Friday's lows).
Equity-only put-call ratios remain on sell signals, even though the market has bounced back this week.
This stock market has been able to ward off even a modest correction
since the fall of 2012. However, we are now seeing a chart breakdown
accompanied by sell signals from some of our most trusted indicators.
If the bears can't make some hay with this environment, I would be
surprised.
Equity-only put-call ratios have rolled over to sell signals.
This week's action makes the $SPX chart bullish (how could it be anything else when trading at new all-time highs?).
There is no technical resistance for a chart at new all-time highs. There is support at 1850 (which had been resistance), then at 1825- 1835 below that. It is our opinion that a close below 1825 would be quite negative.
Equity-only put-call charts continue to be bullish.
The broad market, as measured by the Standard & Poors 500 Index ($SPX) has finally managed to close at a new all-time high. A second day closing above 1850 would solidify the breakout and give it more credence.
Equity-only put-call ratios (Figure 2 and 3) have finally rolled over to buy signals.
Market breadth has been strong all month. As a result, the breadth indicators remain on buy signals, but they are in deeply overbought territory.
In our last issue, we discussed the newest volatility product – the futures that have recently begun trading on the Short-Term Volatility Index ($VXST). One of the things that arose from that discussion was that $VXST “overshoots” $VIX on both the upside and the downside. That is, in periods of high volatility (spike peaks, for example) $VXST rises to higher prices than $VIX does. Conversely, in periods of low volatility, $VXST falls farther than $VIX does.
For information on Fat Tail Distributions and The Empirical PDF refer to Enhancing Option Portfolio Returns Using Probability and Statistics - Part 4.
At face value, it certainly seems as if this new volatility product, the CBOE Short-Term Volatility Index (symbol: $VXST) will be useful and successful. In this article, we are going to look at all of the details (at least as far as they have been disclosed by the CBOE), as well as make some projections about how these new products might trade. These projections will be based partly on theoretical historic data, as well as what we know about how $VIX futures and options trade.
For the Introduction, an explanation of Expected Value, and Expected Value and Option Strategies, and Determining the Probabilities refer to Enhancing Option Portfolio Returns Using Probability and Statistics - Part 1,
Are you having fun yet? Volatility has returned, and the market is a daily dose of pain and pleasure, to either the bulls or the bears. There are plenty of cross-currents now, and in reality, volatility hasn't even increased all that much (statistically).
