VIX Agnotology

In 1993, CBOE launched VIX. It’s fair to say that, at the time, most of the people who knew about VIX probably had a good idea of what the volatility index was and how it worked (since so few people knew about it). Nearly 20 years later, and despite millions of dollars spent on education and instruction, I think it’s likely that the ratio of informed VIX-watchers is much, much lower. VIX shows up on regular nightly newscasts – everyone knows about it – and yet even active day traders stumble over the basic concept. 

Earlier this morning, I mentioned on Twitter that:

I think that second point is as good a litmus test as any for whether an investor should be trading options or not. But let’s leave that alone for now.

The first point is that subjective technical analysis on the VIX is just silly. We don’t need to rehash all the reasons why (see the previous link). What is striking, though, is that the forces of misinformation seem to be winning. All I have is anecdotal evidence, but I don’t remember this much muddled VIX commentary even five years ago. Someone sent along a link that led me to charts like this:

Before you scoff, remember that there are people out there risking capital based on analysis like this. I’m not sure how you feign a justified belief based on these lines and candlesticks, but apparently this sort of thing is enough to get a booking on CNBC.

Now, I don’t intend that agnotology reference literally: I don’t think that there are people who are out there intentionally misleading readers. But they might as well be. @largecaptrader1 jokes that, insofar as VIX confusion increases market inefficiency, maybe it is in the interest of professionals to encourage it. So, yeah: I hear that the Elliott Wave principle applied to a 15-minute spot VIX chart explains 95% of the data.

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3 Comments For This Post

  1. W at Off-Road Finance Says:

    Amusingly, the trade suggested by that chart (short VIX in the high 18s, target high 17s) was a no-adverse-excursion home run. Coincidence? Yeah, but a fun one. I don’t think the VIX anti-TA argument is that strong though really. Yeah, VIX doesn’t trade. But front month S&P options do. If drawing lines on charts works at all, it could work on VIX.

    Maybe I shouldn’t be trading options (actually, I rarely do) because I’m a little surprised VIX is down today. The only reason I can think of for VIX to be down, aside from that usual “that’s where it’s at – deal with it” argument, is that the relatively clean resolution of the Knight bot debacle reduced expected S&P volatility. Am I missing something?

  2. Zack Says:

    While I am currently taking more structured trades, I hesitate to discount technical analysis on the VIX, as it can become a self-fulfilling prophesy. There is a LOT of volume in VXX and the S&P options (and VIX options and futures, though they are poorly coupled to the VIX index).
    Actually, if I could figure out a way to trade the VIX index, I’d be rich. I have yet to figure out how to replicate it closely enough on a daily basis with S&P options… if only there were a real VIX ETN!
    Any suggestions?

  3. Gaston Says:

    Some time ago we made a video about the VIX
    Hope you like it

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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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