Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Classic TA Workplace -- Ignore unavailable to you. Want to Upgrade?

To: skinowski who wrote (126669)	12/3/2005 11:09:23 PM
From: Win-Lose-Draw	Respond to of 209892

When investors are fearful, they bid up the prices of options... Options prices are (nearly always) driven by the writers, not the buyers. VIX rises when book runners expect increased difficulty in hedging away their delta ("price") risk (ie, they expect gaps and poor liquidity.) Occassionally options MMs get a little squeezed before they can fully react, in which case VIX rises so premiums rise so they can top up their account balances quicker by selling (relatively) expensive options. I don't quite understand why you say that "VIX is a number representing a percentage of SPX". I think maybe a later post answered this more fully. A VIX of 20 means 20% of SPX. Naturally, spikes in the VIX tend to mark lows. Except they don't, a lot of the time. The early 80s and mid 90s bull runs both started from low VIX, and the final multi-year leg of the most recent bull was marked by increasing, not decreasing VIX. If you recall '99-'00, many stocks had stopped moving in anything resembling rational form, and were jumping in huge quanta from one price level to another without touching intervening levels. Same on Black Monday, when bids couldn't be found and prices simply plummeted through handles by the dozen leaving enormous intraday gaps. It's the lack of continuousness in price change that jacks up VIX, irrespective of which direction prices are moving in, because it makes it expensive for options writers to hedge away unwanted risks.