Tuesday, July 28, 2009

Is the VIX Being Artificially Depressed?

This a very interesting question posed by the blog VIX and More. In a nutshell he’s asking if it’s possible that the advent of 3x ETFs, swaps, and other instruments that are not measured and captured by the VIX mean that the VIX is artificially lower as the percentage of money in instruments that the VIX does measure (options) may be less than before and thus comparisons to historical standards, AND the pricing of options may be distorted. It’s an interesting question, one that I’ll let you read Bill Luby’s take on here:

Is VIX Being Artificially Depressed by Increased Use of SPXU?

Here’s the main question he poses…

This is the growth of hedging substitutes for the SPX. As the VIX is strongly influenced by the demand for SPX puts, it stands to reason that any substitutes for SPX puts could ‘artificially’ lower VIX levels by diverting demand to alternative hedging products. Historically, these substitutes have included futures, options and various forms of swaps. With the increased interest in ETFs and particularly leveraged ETFs, however, the menu of substitutes has increased dramatically.

For those did not catch my earlier post, Dean Mouscher’s Masteroptions.com is an excellent new site and he is producing terrific and free educational videos. I really like his take and hope that if you trade options that you follow his advice…

Below is a link to a 16 minute video called “Trading the VIX…”

Trading the VIX…

Dean is also writing some good “mythbuster” articles, like Do 90% of Options Expire Worthless?

Good stuff, thanks to both Bill, at VIX and More, and to Dean at Masteroptions.com for your hard work!