timwest

S&P500 & VIX Where is the smart money waiting to buy?

INDEX:VIX   CBOE Volatility Index
2359 13 27
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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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.
+5 Reply
Very instructive! Another addition to my library. Thank you, Sir!
+2 Reply
Should print this.
Great stuff Tim.
+2 Reply