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Strategies & Market Trends : Systems, Strategies and Resources for Trading Futures
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To: GROUND ZERO™ who wrote (27951)7/18/1999 12:13:00 PM
From: keith massey  Read Replies (2) of 44573
 
If you bring up the VIX and S&P for the last two years the period from Nov - July 1999 looks almost like a mirror image of the period from Nov - July 1998 only with a different scale and a little more noise in the signal. Everyone already knows that July 1998 was followed huge drop.

Now my problem is trying to understand the real meaning behind the the VIX indicator. I have read dozen of articles on the VIX but none of them have covered the subject very well. Most of them just refer to the VIX as a inverse indicator and talk about why VIX goes up on bottoms and the odd comment about tops.

For those that don't know - the VIX is constructed using the implied volatilities of eight near-the-money, front- and back OEX calls and puts. It makes sense that during crashes the VIX skyrockets as people rush out to buy Put options.

However if the market is going up and the VIX is dropping it is supposed to mean that the market is meeting the rise with complacency. I agree that less Puts would be bought on the rise....but wouldn't people be buying more call options??? This is where I am puzzles. If the S&P breaks out of a trading range and starts to go higher but VIX continues to drop...what is causing the drop. Less Puts are being bought but wouldn't more calls also be being bought? The VIX closed Friday at its second lowest reading in over two years.

Best Regards
KEITH
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