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Strategies & Market Trends : MDA - Market Direction Analysis
SPY 690.38+0.4%Dec 24 4:00 PM EST
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To: Hawkmoon who wrote (83769)4/27/2003 8:15:38 PM
From: Tom Pulley  Read Replies (3) of 99985
 
Hawk, William gave a good explanation. The link below is to stockcharts' explanation of it which goes into a little more detail. Part of their explanation is as follows:

"It seems that volatility would be a two-way street. However, the stock market has a bullish bias. A rising stock market is viewed as less risky and a declining stock market more risky. The higher the perceived risk is in stocks, the higher the implied volatility and the more expensive the associated options, especially puts. Hence, implied volatility is not about the size of the price swings, but rather the implied risk associated with the stock market. When the market declines, the demand for puts usually increases. Increased demand means higher put prices and higher implied volatilities."

stockcharts.com

Hope this helps. But, I actually don't really understand this myself since I had understood that Black Shoals calculates option premiums based on volatility, yet it appears that this implied volatility is affected more by how bullish people are than by price swings.

Perhaps someone can explain what I'm missing. In any event, there is a clear correlation that a declining Vix occurs during uptrends and an uptrending vix occurs during downtrends. The hard part is determining when the trend changes.

Tom
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