Spot VIX. Daily view.
I'm seeing a lot more posts on Twitter, Facebook, Trading View, and other social media about VIX and VX. What I see in those posts... are a lot of lies.
Why do I say that? Their explanation as to why the VIX was rising or kept elevated. As stated before, VIX will remain relatively elevated for longer periods of time in 2022.
There are 4 reasons why the VIX would rise:
1) Retail traders and small fund managers are buying (equity) option calls at a rapid pace without any hedges. It's usually pretty extreme and hard to anticipate - even in a bull market.
2) Recent price movement is further away from the standard deviation. Meaning, the price range increased (in both directions). This is why the VIX would decrease during flat weeks. This is also the reason why the VIX gets mistaken as an inverse index to ES.
3) This is esoteric. The algorithms would sometimes perform a "support test" early in the morning which briefly spikes down. Sometimes this is a prelude to a VIX spike, but not that reliable as the "test" can sometimes fail and VIX sinks lower (e.g. most of 2020).
4) This is the most important cause. VIX rises when there is increased institutional or big fund hedging. This cause requires a lot of digging to find the reasoning behind the hedges. For example, did the credit market tank? Did bond yields spike like Nov 2020 to Mar 2021? Did the bond yield curve cross certain thresholds below? Did VIX reach a long-term, multi-year trend line below? That last one is the trickiest as you would have to guess what algorithms are thinking.
Reason #4 was primarily why VIX is elevated. It's due to hedging into quantitative tightening scares. VIX stays elevated when the hedges are rolled over. However, on March 8th, the market was over-hedged in general. That's why I had my red dashed line above. It was an approximate measure to where the market would be over-hedged. Once the market is over-hedged, it's hard for ES to go much lower. It means the sellers have played their hand already. When the FOMC announcement was made with the 0.25% rate hike, the market was already preparing for a 0.50% rate hike. So the "news" was already expected and nothing was a surprise. That's when the hedges were dropped/covered (which is a buying action) most of last week.
Retail permabears wondered why VIX wasn't over 50. As stated before, it would take a big surprise to get it over 50. Think about it. Everyone and their mothers were talking about the rate hikes and quantitative tightening. Meaning, institutions were worried months before and made their moves before it happened. They were worried when the bond yield curve tanked since November 2021.
Here is the kicker. The VIX looks at the options market. The hedging it detects are primarily in the options market. Big investors and big funds have been using futures to hedge their portfolios. Futures qualify under section 1256 which is a tax advantage over traditional hedging (short shares or options). Clever, don't you think? So, there were more hedges that meets the eye.
Now that you know the reasons why the VIX rises and why it's not spiking over 50, you can compare this information to retail posters who have no clue what they are saying. How do you spot a liar? The following are the red flags:
1) When they treat the VIX like a purely inverse index to ES. Example: "VIX goes up when market goes down." Flat red days can cause VIX to go down.
2) Calling the VIX by its media label as the "fear index." You can see there are 2 reasons that would contradict this.
3) Posting conspiracy theories that "they" (whoever "they" are) suppressing the VIX.
4) Concentrating way too much on the 2020 spike and not the big picture. That means they are new to VIX.
5) Does not know the difference between VIX and VX. VX is the VIX futures and the derivative based on spot VIX. That's the derivative which all volatility ETFs base off.
6) Related to #5, they don't take contango or backwardation into consideration. Contango between VIX and VX is the reason why those volatility ETFs kept decaying over time.
7) The biggest red flag: they treat trading VX as a sport event than a business. You will know this by the constant need to brag, to trade against a "rival," or to trade for vindication over effectiveness. It means they lack any sort of experience or knowledge in the VIX or VX that they are covering it up with "confidence." Most experienced VX traders keep it to themselves because they all had a moment when the VIX and VX humbled them (especially me).
Did any of these red flags above sound familiar? With this long post, do you see why there are very, very few real VX traders?
Trivia: People asked why VXX exploded. This happened to TVIX a couple times before. Simply, the owning entity reached their "internal limit" or credit limit. Without any more shares (notes for TVIX) to issue out, the demand kept raising the price. That's when the ETF/ETN becomes pretty dangerous to trade as no one would know when Barclays would issue more shares.
I'm seeing a lot more posts on Twitter, Facebook, Trading View, and other social media about VIX and VX. What I see in those posts... are a lot of lies.
Why do I say that? Their explanation as to why the VIX was rising or kept elevated. As stated before, VIX will remain relatively elevated for longer periods of time in 2022.
There are 4 reasons why the VIX would rise:
1) Retail traders and small fund managers are buying (equity) option calls at a rapid pace without any hedges. It's usually pretty extreme and hard to anticipate - even in a bull market.
2) Recent price movement is further away from the standard deviation. Meaning, the price range increased (in both directions). This is why the VIX would decrease during flat weeks. This is also the reason why the VIX gets mistaken as an inverse index to ES.
3) This is esoteric. The algorithms would sometimes perform a "support test" early in the morning which briefly spikes down. Sometimes this is a prelude to a VIX spike, but not that reliable as the "test" can sometimes fail and VIX sinks lower (e.g. most of 2020).
4) This is the most important cause. VIX rises when there is increased institutional or big fund hedging. This cause requires a lot of digging to find the reasoning behind the hedges. For example, did the credit market tank? Did bond yields spike like Nov 2020 to Mar 2021? Did the bond yield curve cross certain thresholds below? Did VIX reach a long-term, multi-year trend line below? That last one is the trickiest as you would have to guess what algorithms are thinking.
Reason #4 was primarily why VIX is elevated. It's due to hedging into quantitative tightening scares. VIX stays elevated when the hedges are rolled over. However, on March 8th, the market was over-hedged in general. That's why I had my red dashed line above. It was an approximate measure to where the market would be over-hedged. Once the market is over-hedged, it's hard for ES to go much lower. It means the sellers have played their hand already. When the FOMC announcement was made with the 0.25% rate hike, the market was already preparing for a 0.50% rate hike. So the "news" was already expected and nothing was a surprise. That's when the hedges were dropped/covered (which is a buying action) most of last week.
Retail permabears wondered why VIX wasn't over 50. As stated before, it would take a big surprise to get it over 50. Think about it. Everyone and their mothers were talking about the rate hikes and quantitative tightening. Meaning, institutions were worried months before and made their moves before it happened. They were worried when the bond yield curve tanked since November 2021.
Here is the kicker. The VIX looks at the options market. The hedging it detects are primarily in the options market. Big investors and big funds have been using futures to hedge their portfolios. Futures qualify under section 1256 which is a tax advantage over traditional hedging (short shares or options). Clever, don't you think? So, there were more hedges that meets the eye.
Now that you know the reasons why the VIX rises and why it's not spiking over 50, you can compare this information to retail posters who have no clue what they are saying. How do you spot a liar? The following are the red flags:
1) When they treat the VIX like a purely inverse index to ES. Example: "VIX goes up when market goes down." Flat red days can cause VIX to go down.
2) Calling the VIX by its media label as the "fear index." You can see there are 2 reasons that would contradict this.
3) Posting conspiracy theories that "they" (whoever "they" are) suppressing the VIX.
4) Concentrating way too much on the 2020 spike and not the big picture. That means they are new to VIX.
5) Does not know the difference between VIX and VX. VX is the VIX futures and the derivative based on spot VIX. That's the derivative which all volatility ETFs base off.
6) Related to #5, they don't take contango or backwardation into consideration. Contango between VIX and VX is the reason why those volatility ETFs kept decaying over time.
7) The biggest red flag: they treat trading VX as a sport event than a business. You will know this by the constant need to brag, to trade against a "rival," or to trade for vindication over effectiveness. It means they lack any sort of experience or knowledge in the VIX or VX that they are covering it up with "confidence." Most experienced VX traders keep it to themselves because they all had a moment when the VIX and VX humbled them (especially me).
Did any of these red flags above sound familiar? With this long post, do you see why there are very, very few real VX traders?
Trivia: People asked why VXX exploded. This happened to TVIX a couple times before. Simply, the owning entity reached their "internal limit" or credit limit. Without any more shares (notes for TVIX) to issue out, the demand kept raising the price. That's when the ETF/ETN becomes pretty dangerous to trade as no one would know when Barclays would issue more shares.