You Don’t Need the VIX

My colleague at Expiring Monthly, Adam Warner, has taken people to task over the last several days for obsessing over the VIX, and especially for misapplying it:

OK, what’s wrong with this statement:

Look at that…$VIX drops below 20 and pigs fly again.  Only reliable indicator that I know of that level.

If you answered “everything” you would be correct. But let’s see how far off the reservation someone can go in 140 characters. And again, this is a very sharp mind, albeit from other areas.

Problem 1 is, there’s no magical round number level in the VIX that has any meaning over another level. The move from 21 to 20 for example has no greater meaning than the move from 20 to 19 (no points for commenting that the percentage move is greater from 20 to 19). VIX at 20.10 does not imply a wild market, while 19.90 means all’s calm, buy everything.

Problem #2 is, the whole concept is utterly backwards. Umbrellas don’t cause rain. Lower VIX does not cause a calmer market, rather it’s a reflection of a calmer market.

Now, Adam’s a true gentleman, and doesn’t call out the offending Twitter denizen here by name. But I saw that particular tweet go by, and have seen similar comments from that person – and many others – in recent months. There are two misconceptions at work in much VIX commentary. First, people don’t understand that correlation is not causation. Any sentence composed of the semantic atoms “the market” and “VIX” and the connective “because” is fraught with logical danger; a safer alternative will always be to simply note that “the market [rose/fell] and the VIX [rose/fell],” removing the implication of causality entirely. The second problem is that people don’t understand what the spot VIX is. Phrases like “the fear index” are just metaphors. The spot or cash VIX level is not entirely meaningless, but it’s no more meaningful than any other local metric of implied volatility.

In fact, I can’t think of a single trader for whom the spot VIX is absolutely essential. For any optionable asset, whether a stock, ETF, commodity, or index, the implied volatility of the individual options being traded are easily calculated, and are far more important than the VIX snapshot. I frequently trade VIX futures, but even in that case I don’t regard the spot VIX as a crucial piece of information, since I’m primarily interested in the term structure of the futures, not the blips in the 30-day spot statistic. I think the reason the spot VIX has because so popular is that we’re all a bit lazy sometimes, and will tend to opt for the simplest, most accessible broad barometer available. The commentariat could easily replace VIX with SPX at-the-money implied volatility and lose nothing in translation.

Adam is ready, in a tongue-in-cheek way, to ban the spot VIX. I concur. If someone wants to comment about goings-on in the VIX products (which have their own conceptual barriers to entry) in an intelligent way, I’m happy to listen. But using the VIX for general market commentary is like revving up your SUV just to walk the dog.

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12 Comments For This Post

  1. Mark Wolfinger Says:

    Sometimes the writer is just seeking publicity and web traffic. The banter doesn’t have to be accurate – just controversial.


  2. jb Says:

    I obviously agree will all that you say especially when we are talking about a spike in the VIX on the same day there is a selloff. But, there is something to the fact that an elevated VIX on a sticky basis (compared to say its average) will sooner rather than later lead to some selling – simply because people are buying more puts and so it can be a sentiment indicator. Ofcourse the sentiment being indicated can be wrong and the people buying puts can lose but the point is it can be used in a predictive way (with the same pros/cons and success probability of any other technical indicator, perhaps).

  3. Chris McKhann Says:

    Great post – I totally agree

  4. blingsholes Says:


    I follow you on twitter and I like a lot of what you have to say. I disagree with you on the VIX. I agree that the VIX Index is misunderstood…However the VIX calculation is used as the ATM strike for a Plain Vanilla 30 day SPX Variance swap. Nothing more nothing less. It’s related to VIX futures but contains convexity properties that differ from VIX Futures…let me know if you would like me to forward a paper on this…



  5. Jared Says:

    Blingsholes: that’s right, VIX is the variance swap rate with a constant 30-day maturity. I’m not sure what you’re disagreeing with.

  6. blingsholes Says:

    I was disagreing with paragraph 3 “In fact, I can’t think of a single trader for whom the spot VIX is absolutely essential.”…dont forget the variance guys…(for those of them who are left).

  7. Jared Says:

    Ok, fair enough. I assume that anyone large enough to trade OTC swaps is also doing their own pricing.

    To be clear, I’m a big fan of the VIX methodology. I just think it might be better if CBOE stopped distributing spot VIX quotes for a few months, so that retail people were forced to look at the actual implied vol of whatever they’re trading.

  8. Abhishek Says:

    The rush to safe haven assets today was frightening to say the least.As I write this VIX went up by more than 50% while Yen is up more than 5% .10 year Treasuries have recovered from 3.29% yield to 3.41% yield beginning at 3.59% and the US markets have recovered from down 8% to down 3% . Don’t know why the stock markets recovered so quickly after falling equally quickly while the currency pairs show no signs of recovering.

  9. Carl Says:

    I’m one of those retail guys. The spot VIX is easy to find. Where do I find the implied volatility for what I’m trading?

  10. Jared Says:

    Carl: a good measure of the implied volatility for a stock or ETF you’re trading is the implied volatility of the at-the-money options closest to expiration. You can get free delayed option quotes from various places online (Yahoo, etc.) or live quotes from any decent broker.

  11. Carl Says:

    Sorry to be the “retail” poster boy… but when I go searching for Implied Volatility calculators I am bombarded with the good, bad and the ugly, topped off with Wilmott discussions on all the varietals… Any IV calculators you would recommend?

  12. Jared Says: should have what you’re looking for.

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Jared Woodard specializes in trading volatility as an asset class. With over a decade of experience trading options and other volatility products ... Read More


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