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Strategies & Market Trends : MARKET INDEX TECHNICAL ANALYSIS - MITA
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To: J. P. who wrote (11378)3/28/2002 9:58:14 AM
From: macavity  Read Replies (1) of 19219
 
Explanation.


By comparing Implied Volatility VIX with actual volatility - Historic Vol - you are making a guess as to whether an option is cheap or expensive relative to how the price has been moving, and therefore how the price may move.

16% vol corresponds to 1%/Trading day.
Thus if VIX is at 20% and the market is moving less than 1% a day/ or less than 2 1/4 % per week then implied vols are expensive and may result in option traders selling vol rather than buying it despite VIX being at a low
Turning pts in low vol tend to occur when
i) VIX is at the low of the range
ii) Implied Vol is cheap.

To look at VIX without looking at how volatile the actual markets are is only getting half the picture IMO.

-macavity
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