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Showing results for tags 'vix'.
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I wanted to start a discussion on this topic of thinking about the intraday high to low range of the S&P futures and the level of the VIX. I am not an options expert by any means -- but have spoken to some option market makers about this and here are some thoughts. Any options experts that would like to chime in would be great for discussion. 1. VIX and range should be related VIX is 30-day implied volatility of returns. The term 'returns' implies that it is measuring the 'closing price to closing price' volatility. So there is a difference here -- 'close to close' is different than 'range' (ie, the high vs the low). Nevertheless, the ranges will likely be affected by the same things that are causing 'close-to-close return volatility'. 2. VIX Math Basics: VIX is stated as an annual percentage To convert an annual VIX percentage to a single day percentage, the math is to take the square root of the number of trading days in a year. ie 252^(1/2). Divide VIX by this number (~15.9). example, a 30 VIX equates to a single day return volatility of 30 / (252^0.5) =~1.89% This would be the expected average daily % change over the next 30 days. You can re-arrange this formula and ballpark an implied volatility from daily returns. For example, if price has varied by 1.89% -- then you have" (252^0.5) = ~15.9 .0189 x 15.9 = 30 Note, VIX is a weighted average of the current month and next month options volatility. This calculation is done every day such that you are always comparing apples to apples (ie, if you used only the near-term contract then it wouldn't be a consistent 30-day-forward looking calculation). 3. How does VIX do at predicting the forward 30-day close-to-close return volatility? I am not going to go into this as this is a lengthy discussion for which I am not fully qualified. But basically, it does a fair job. 4. How does VIX do at predicting the NEXT DAYS range? I am not going to present all the data here but here are some highlights: over the last 7 years: the S&P futures have achieved the implied range of the previous days closing VIX 54% of the time. In 2008, a year of ever rising VIX, this figure was 65%. The lowest year was 2007 at 42%. Now, let me be clear that this is just a 'thought piece' and not supposed to be used for hard and fast rules. A few ideas: Expect the market to do a range that falls between 0.7 and 1.3x what VIX is implying much of the time. About 5% of the time, the range has been > 2.0x what VIX implied (these are the outliers). About 30% of time, market will do 1.4x or more what VIX implied for a range. (these numbers are based on historical 7 years and should not be thought of as precise forecasts of the future). I have done some quick EasyLanguage code to present a working idea for an indicator for using this concept (note you input the previous days closing VIX -- or some estimate of what you think is the 'right' forward VIX estimate is --- and it spits out the projections to track against the developing high-to-low range): EL Code: inputs: VIX(46); value1=squareroot(252); value2=(VIX/100)/value1; value3=closed(1)*(value2*1.0); value4=highd(0)-lowd(0); value10=closed(1)*(value2*1.0); value11=closed(1)*(value2*0.7); value12=closed(1)*(value2*1.3); if time > 934 then Plot1(value4,"+Range"); if time > 934 then Plot2(value10,"1.0"); if time > 934 then Plot3(value11,"0.7"); if time > 934 then Plot4(value12,"1.3");
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Important Reminder for all traders: The VIX is at its lowest level since June 2007 at 13.36
