There are some that believe that the VIX can predict future price volatility in the market. Mean Reversion is one thing, but the believers in the predictive nature of the VIX claim more. The head of our research team, Michael Rechenthin, Ph.D., aka Dr. Data, joined the guys to check this out. Mike mentioned that this is a topic covered in Shelly Natenberg’s book “Option Volatility & Pricing”. What exactly did Dr. Data find out?
Mike began by displaying a graph charting both the VIX and the SPX (S&P 500 Index). He also displayed a scatter plot chart of the daily change in the VIX versus the daily change in the SPX. The strong inverse correlation between the two can be seen and it was noted on the scatter plot that the negative correlation was -0.71. Mike mentioned that the VIX tends to move 4 times as much as a percentage change in the S&P 500. So we know about the high negative correlation, but if the VIX is predictive of future volatility when the VIX increases, we would expect to see the future market action more volatile than the past.
Dr. Data proved that there is nothing behind the claims of VIX’s predictive abilities. He produced another scatter plot graph which plotted the change in volatility (forward volatility minus historical volatility) versus the daily change in the VIX and showed no predictability. Another chart displayed the difference between Implied Volatility and Actual Volatility over a 10 year period. Mike explained how this demonstrated Implied Volatility overstates actual volatility and how persistent fear after large moves can cause an overestimation of volatility. Tracking the VIX will give you an edge in selling premium because Implied Volatility (IV) is mean reverting but it doesn’t predict the level of future volatility in the markets.
Watch this segment of Skinny on Options Data Science with Tom Sosnoff, Tony Battista and Dr. Data, aka Michael Rechenthin, Ph.D., for a fascinating look into the the age old question; does the VIX have the ability to predict future market volatility?
This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.
tastylive content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tastylive, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastylive is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tastylive is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer. Options, futures, and futures options are not suitable for all investors. Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on tastytrade.com/disclosures.
tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.
tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tastylive is the parent company of tastytrade.
tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tastylive nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.
© copyright 2013 - 2024 tastylive, Inc. All Rights Reserved. Applicable portions of the Terms of Use on tastylive.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastylive’s podcasts as necessary to view for personal use. tastylive was previously known as tastytrade, Inc. tastylive is a trademark/servicemark owned by tastylive, Inc.