I published this chart back in July before the madness in August and I pointed out the 194-182 level as an important level for the market to re-test since it didn't get tested since last fall and historically, these levels have gotten tested.
Why is this important?
The buyers that step in and buy when the market is falling apart are the strong hands and they are being sold stock by the weak hands. Those of us who feel like we are always the weak hands or the small money shouldn't feel that way because IF YOU ARE SELLING in a VIX SPIKE, then you are in the category of weak hands. So, all you have to do is change your behavior and you will become the smart money. So, you can become part of the elite club that buys when VIX is HIGH instead of the opposite.
Why does VIX rise?
VIX is the volatility of the options around the current market price and it measures the willingness of traders to price in how much movement they expect in the S&P500 over the term of the options contracts, and VIX is priced to 30 days. If traders believe that volatility is rising, they will offer their contracts to sell at higher prices so when the buyers come in to buy those contracts, they have to pay higher prices for them. If the buyers walk away from the prices being offered by the sellers, then VIX will settle back down the way any market will settle down.
There are many ways that VIX changes in price and it can happen because: 1. Buyers of calls (bulls, or short sellers) rush in to buy calls fearing they will miss a move to the upside. (Short sellers use calls to hedge against their positions). Buyers of options pay the offered price and push up the value of VIX. 2. Buyers of puts (bears, or longs) rush in to buy puts fearing they will miss a move to the downside. (Longs purchase puts to lock in their worst-case scenario). Buyers of options pay the offered price and push up the value of VIX. 3. Sellers of calls (nervous bulls, or bulls taking profits, or bulls turning bearish) rush in to take advantage of current high prices of the S&P500. Sellers of options sell on the bid-side of the market and drive down the value of VIX. 4. Sellers of puts (nervous bears, or bears taking profits, or bears turning bullish) rush in to take advantage of current low prices of the S&P500. Sellers of options sell on the bid-side of the market and drive down the value of VIX.
The way to interpret movements in VIX is to assess the mood of the market participants.
If VIX rises, it is a sign that buyers of puts or calls are moving into the market in the expectation of a price move. If no move materializes, then the slight move that happens WHILE VIX IS MOVING UP will likely be reversed in the amount of time that the setup happened. If it took a few hours, then the next few hours will reverse the situation.
If VIX rises and price move follows, then we can conclude that their is a trend and there is strong order flow behind the price move. Buyers of call or put options can tend to be buyers of the underlying index front-running their own orders. If you see a price move with VIX moving, then assume it will continue for the same amount of time as the first move occurred.
You can also look for price skews between the puts and the calls such that if the puts rise in price more than the calls when VIX rises, then you can conclude that traders are BUYING PUTS because of the extra intensity of put price movement up relative to call prices. The VOLUME of options is NOT THAT IMPORTANT, as most people think. Yes, it is logical to think that way, but it really depends upon the INTENSITY of the order flow and not the volume.
I will add to this later - I look forward to any of your questions and hope to explain VOLATILITY more thoroughly.
Cheers.
Oh - and VOLATILITY IS OPPORTUNITY, not risk. Most people get that backwards. Without volatility there will be very little chance to profit from price swings. So, change the way you look at volatility
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timwest
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Here is the rest of the description:
Why is this important?
The buyers that step in and buy when the market is falling apart are the strong hands and they are being sold stock by the weak hands. Those of us who feel like we are always the weak hands or the small money shouldn't feel that way because IF YOU ARE SELLING in a VIX SPIKE, then you are in the category of weak hands. So, all you have to do is change your behavior and you will become the smart money. So, you can become part of the elite club that buys when VIX is HIGH instead of the opposite.
Why does VIX rise?
VIX is the volatility of the options around the current market price and it measures the willingness of traders to price in how much movement they expect in the S&P500 over the term of the options contracts, and VIX is priced to 30 days. If traders believe that volatility is rising, they will offer their contracts to sell at higher prices so when the buyers come in to buy those contracts, they have to pay higher prices for them. If the buyers walk away from the prices being offered by the sellers, then VIX will settle back down the way any market will settle down.
There are many ways that VIX changes in price and it can happen because:
1. Buyers of calls (bulls, or short sellers) rush in to buy calls fearing they will miss a move to the upside. (Short sellers use calls to hedge against their positions). Buyers of options pay the offered price and push up the value of VIX.
2. Buyers of puts (bears, or longs) rush in to buy puts fearing they will miss a move to the downside. (Longs purchase puts to lock in their worst-case scenario). Buyers of options pay the offered price and push up the value of VIX.
3. Sellers of calls (nervous bulls, or bulls taking profits, or bulls turning bearish) rush in to take advantage of current high prices of the S&P500. Sellers of options sell on the bid-side of the market and drive down the value of VIX.
4. Sellers of puts (nervous bears, or bears taking profits, or bears turning bullish) rush in to take advantage of current low prices of the S&P500. Sellers of options sell on the bid-side of the market and drive down the value of VIX.
The way to interpret movements in VIX is to assess the mood of the market participants.
If VIX rises, it is a sign that buyers of puts or calls are moving into the market in the expectation of a price move. If no move materializes, then the slight move that happens WHILE VIX IS MOVING UP will likely be reversed in the amount of time that the setup happened. If it took a few hours, then the next few hours will reverse the situation.
If VIX rises and price move follows, then we can conclude that their is a trend and there is strong order flow behind the price move. Buyers of call or put options can tend to be buyers of the underlying index front-running their own orders. If you see a price move with VIX moving, then assume it will continue for the same amount of time as the first move occurred.
You can also look for price skews between the puts and the calls such that if the puts rise in price more than the calls when VIX rises, then you can conclude that traders are BUYING PUTS because of the extra intensity of put price movement up relative to call prices. The VOLUME of options is NOT THAT IMPORTANT, as most people think. Yes, it is logical to think that way, but it really depends upon the INTENSITY of the order flow and not the volume.
I will add to this later - I look forward to any of your questions and hope to explain VOLATILITY more thoroughly.
Cheers.
Oh - and VOLATILITY IS OPPORTUNITY, not risk. Most people get that backwards. Without volatility there will be very little chance to profit from price swings. So, change the way you look at volatility and look at it constructively and not from a fear-based perspective.
SPYderCrusher
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Tim your analysis is always on point, thank you for the time and effort you put in.
timwest
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Thanks @SPYderCrusher - Thanks for sharing your appreciation.
IvanLabrie
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Should print this.
Great stuff Tim.
moorekapital
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Very instructive! Another addition to my library. Thank you, Sir!
timwest
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The fact that the market is holding underneath the level where the buyers were on this correction (12%+ in the S&P500), it tells me that the buyers are very weak. Normally the market LIFTS ABOVE the level where the buyers have accumulated their shares. Not so this time. The buyers can't overcome the sellers. The sellers are in control here. In football analogy, the defense is still on the field here. The market can rally (score) with the defense on the field, but it is rare. The S&P500 needs to climb above 199 in order to be in a healthy condition again. That is the issue. If the buyers can't absorb the stock and clear out the 199 level on SPY, then the BEAR has the upper hand. To be continued.... 9/28/2015 11:45AM EST
timwest
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Here we are 18 days later and the S&P500 is barely gaining ground. At least it is above the 199 level as mentioned above in my last comment.
eran.arad
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Hey Tim,
Something I don't understand. The VIX is highly correlated with the SPY. From what you say if the VIX goes up without movement in the market (SPY) than it will go down, but does it ever happen? whenever I see VIX goes up, I see SPY goes down and vice versa...
timwest
⋅
Hello Eran. VIX rises when general assumptions of volatility rise. VIX does rise when SPY rises too. Not very often, but it does happen.
Why is this important?
The buyers that step in and buy when the market is falling apart are the strong hands and they are being sold stock by the weak hands. Those of us who feel like we are always the weak hands or the small money shouldn't feel that way because IF YOU ARE SELLING in a VIX SPIKE, then you are in the category of weak hands. So, all you have to do is change your behavior and you will become the smart money. So, you can become part of the elite club that buys when VIX is HIGH instead of the opposite.
Why does VIX rise?
VIX is the volatility of the options around the current market price and it measures the willingness of traders to price in how much movement they expect in the S&P500 over the term of the options contracts, and VIX is priced to 30 days. If traders believe that volatility is rising, they will offer their contracts to sell at higher prices so when the buyers come in to buy those contracts, they have to pay higher prices for them. If the buyers walk away from the prices being offered by the sellers, then VIX will settle back down the way any market will settle down.
There are many ways that VIX changes in price and it can happen because:
1. Buyers of calls (bulls, or short sellers) rush in to buy calls fearing they will miss a move to the upside. (Short sellers use calls to hedge against their positions). Buyers of options pay the offered price and push up the value of VIX.
2. Buyers of puts (bears, or longs) rush in to buy puts fearing they will miss a move to the downside. (Longs purchase puts to lock in their worst-case scenario). Buyers of options pay the offered price and push up the value of VIX.
3. Sellers of calls (nervous bulls, or bulls taking profits, or bulls turning bearish) rush in to take advantage of current high prices of the S&P500. Sellers of options sell on the bid-side of the market and drive down the value of VIX.
4. Sellers of puts (nervous bears, or bears taking profits, or bears turning bullish) rush in to take advantage of current low prices of the S&P500. Sellers of options sell on the bid-side of the market and drive down the value of VIX.
The way to interpret movements in VIX is to assess the mood of the market participants.
If VIX rises, it is a sign that buyers of puts or calls are moving into the market in the expectation of a price move. If no move materializes, then the slight move that happens WHILE VIX IS MOVING UP will likely be reversed in the amount of time that the setup happened. If it took a few hours, then the next few hours will reverse the situation.
If VIX rises and price move follows, then we can conclude that their is a trend and there is strong order flow behind the price move. Buyers of call or put options can tend to be buyers of the underlying index front-running their own orders. If you see a price move with VIX moving, then assume it will continue for the same amount of time as the first move occurred.
You can also look for price skews between the puts and the calls such that if the puts rise in price more than the calls when VIX rises, then you can conclude that traders are BUYING PUTS because of the extra intensity of put price movement up relative to call prices. The VOLUME of options is NOT THAT IMPORTANT, as most people think. Yes, it is logical to think that way, but it really depends upon the INTENSITY of the order flow and not the volume.
I will add to this later - I look forward to any of your questions and hope to explain VOLATILITY more thoroughly.
Cheers.
Oh - and VOLATILITY IS OPPORTUNITY, not risk. Most people get that backwards. Without volatility there will be very little chance to profit from price swings. So, change the way you look at volatility and look at it constructively and not from a fear-based perspective.