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Technical Update: Big Changes In Volatility

  • Written by Syndicated Publisher 38 Comments38 Comments Comments
    October 20, 2011

    Tuesday we discussed how the Vix was falling but the Skew was rising. On the surface the Vix looked like investor fear was subsiding yet “under the hood” was a different story. If fear was truly subsiding the Skew would not have registered such a large move up as it did on Tuesday.

    Wednesday saw a complete reversal with the Skew falling which is reflected in today’s Vix closing price. Remember the Skew shows how volatility is distributed. When the Skew is rising it means investors are buying “tail risk” options or out of the money puts. You could oversimplify and say it’s an early warning of sorts of a pending change in the Vix.

    Once the Vix begins moving higher “tail risk” becomes “perceived or real risk” and begins showing up under Vix methodology as implied volatility is distributed more uniformly.

    So what does this all mean? Take a look at the charts.

    SPX

    Probability favors more equity selling pressure based on the move lower in the Skew Vix Divergence.

    Vix

    Probability favors a higher Vix based on the sharp reversal of the Skew and the inverse correlation with the Vix.

     

    Images: Flickr (licence attribution)

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