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Pastimes : Clown-Free Zone... sorry, no clowns allowed
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To: John Madarasz who wrote (76936)3/7/2001 10:53:40 PM
From: LLCF  Read Replies (1) of 436258
 
First let me say that the VIX is unfortunately too short term in duration to be a really useful price indicator of insurance on the equity market... that's why we see these big swings as traders jam the vol around trying not to get bagged. Makes for fun watching but it's more of a short term indicator IMO.

<I doubt that another 1987-like panic will ever occur. The DJIA now has circuit breakers that trigger automatic shutdown of all stock market, equity futures, and option trading. Instead, the sell-offs will be relentless and determined, but over a longer period of time rather then a one- or two-day event. >

Well I know this makes no sense.

The rest, I don't know, much of it makes sense... it is perceived that markets go down much faster than they go up [vol is 'skewed' to the downside with 10% out of the money pooots trading @ much higher vol level than 10% out of the money calls... this phenom has been muted to some extent in the past few years due to the belief in the 'Greenspan put'] so when the mkt looks down the vol gets puffed up pretty quickly. A vicsious rally on the other hand rarely results in remotely similar action in the calls. The exception to the rule was the i-nut stocks [and index for all I know] which had 'flat' or reverse skew, or takeover rumors.

Now, there are a couple of things at work here... punting away and hedging with index vol itself... and the arb between the index vol and the individual equity vols. There are natual sellers of the individual equity vols through the 'buywrite' strategy, with tons of it [insurance if you will] sold to traders by dopey institutions who don't know any better... this will find it's way into sales of index vol to compete the arb. Most big trading operations from I-bank desks to individual traders suck up this individual vol., the more sophisticated ones lay off in the index's.

The phenom of the VIX being transformed at bottoms is simply massive 'buywriting' by institutions as they wade back in to buy stocks... and bag holders selling calls instead of puking stocks "at these levels".

The 'spike' in VOL during a sharp downturn is exacerbated by the 'buywriter' bagholder throwing in the towel and puking his stock which results in having to buy back the calls in order to not be short and washing his hands of the whole thing. This runs contrary to the prevailing view that put buying drives up VOL... of course this happens too I suppose, but by FAR the largest amount of insurance outstanding in the equity market place is buywrites on individual stocks, and it must be covered to complete the puke.

DAK
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