MARKET INDEX TECHNICAL ANALYSIS - MITA Message Board

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Strategies & Market Trends : MARKET INDEX TECHNICAL ANALYSIS - MITA

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To: Matthew L. Jones who wrote (4163)	8/21/2000 6:35:15 PM
From: macavity	Read Replies (2) of 19219

VIX tricks. The VIX represents implied volatility - the cost of options - I would be very wary of saying this equates to bearishness/bullishness. LEOs charts demonstrate this point very well. I remember buying FTSE (UK Index) volatility @ 11.50% volatility in 1995/96 (when I had a day job) and losing money every day from the time decay. SPX vol was around 10-11% at the time. Recently the markets have been moving in a range and when this happens it becomes exceptionally hard for option traders (with long option positions) to capture the time-decay of their options. Short option traders watch and laugh at them from the sidelines. To get a better idea of the value of the option (to an option trader) then you should compare the implied volatility (VIX) to the process , or historic, volatility. This is usually a premium for most equity index markets (with the curious exception of the Nikkei-225) representing the supply-demand structure of the markets - investors usually buy bets (calls) / protection (puts) from the market, apart from Japan where they sell options to get premium to generate accounting profits to massage their financial figures. Therefore you should look at plotting the following:- Premium = VIX - OEXHistVolatility or Premium = (VIX/OEXHistVolatility) - 100%. When the market trades in a range then historical volatility can collapse, the VIX has to follow . I am not able to do this with my technology at the moment, but I am sure others may. I hope that this helps people get some idea about how an option trader actually considers options. There is an argument that option markets are now so much more sophisticated and deep that implied volatility actually leads process volatility. I would lean more to this view. Clearly they do not predict wars or assasinations, but if implied vol creeps slowly lower then I would reckon that things are going to quieten down. Sorry that I am late to this discussion I have been busy elsewhere. As some of you may be aware I have been trying to finish a rather large portion of crow pie. - tastes nothing like chicken, trust me. - macavity

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