Posted on April 22, 2018 8:22 pm

$VIX | Understanding Volatility - The Coolest Visualization Ever

A product funded and owned by the CBOE (Chicago Board of Options Exchange).
The Put to Call Ratio of Open Interest on $SPX [the S&P 500] for the next month of option expiry dates.

$VIX [$VXX / $UVXY / $SVXY  / $TVIX / $VX_F / etc…]



Whoa whoa. Things really got out of hand there.

We went from a thirty-day forward-looking Put To Call Ratio on a basket of 500 stocks to FEAR.

To quote Warren Buff….err…Yoda (the ancient wizard of the Jedi Council. I mean, homeboy spent 800 years training Jedis. In dog years, that would put the Oracle of Omaha somewhat close to that age [he’s 87 years old…800/7…you get it].

“Fear is the path to the dark side…fear leads to anger…anger leads to hate…hate leads to suffering.”

  • Yoda (900+ year-old Jedi Master)

Yeah. I know what you’re thinking.

This dude has lost his mind. I should close this article right now.

Don’t. I’ll get serious now.

Why Does Volatility Matter? And where’s that cool video you mentioned?

Well, it matters if you’re trading volatility directly through any of the tickers I listed above.

Beyond that, as I had mentioned in a prior post,the thing about volatility is this. It’s a product whose owners make far more money and on a more reliable basis than almost any trader can dream of.

Most people get the meaning of $VIX wrong though.

This is primarily because they’ve had a conception of $VIX repeatedly drilled into their minds as the Fear Indicator by market commentators of all varieties.

I would really enjoy it if I started hearing people on CNBC or Bloomberg start to use the term “hedge indicator”. As I said (the exact formula is in the post linked to above), $VIX is pretty much a fancy Put to Call Ratio. When it rises, all that really means that the open interest in puts outweighs the open interest in calls on $SPX for all expiries in the mext month.

This DOES NOT mean, whatsoever, that a spike in $VIX means that the market is in death mode. As Christopher Cole, founder of Artemis capital and co-creator of that awesome video I mentioned puts it…

“I’m not saying the whole world will end tomorrow….we might have a situation where there’s a race to the right tail, where we might have high volatility and high asset returns. You know, one last blow out top…” [from this interview: ]


The Rhythm Of The Market

Over in my trading room, I can feel the frustration of newer players in the game when they ask me about indicators and entry points. There seems to be a belief that the wizards of the market have some sort of special sauce they’re using to make killer trades.

I lack the audacity to call myself a wizard of the markets. What I do have is common sense.

After a few months of people asking me for ‘secret sauce’, I started to respond to them with a simple (albeit fairly perplexing to some) answer.

I use the rhythm of the market.

I trade off of my gut for the most part by using that rhythm and synching to it. When the tempo changes, I typically cash out of my short dated options positions or wait before I can pick the rhythm back up before taking on any more trades.

Which isn’t to say I dont look  at charts or do any technical analysis. Charts to me are roughly sketched maps. They are indeed useful for orientation. Also, they can help you with trying to figure out the balance of power when a certain asset seems to be at a point of contention… where it is in an indecisive mode and about to make a sharp jerk up or down.

As I put it to a different member who in gest said he wanted to compose the music of the market: “Well the formula is simple; volume [on whatever asset you’re trading] is the frequency of the sound  wave,  and the price is the wavelength.

Chartists typically love Fibonacci retraces; and I’ll admit that price action does stick to those levels.e fact that I think that those levels are now manipulated by high frequency traders and algorithmic trading is the subject for a different  blog post. I raised the point of Fibonacci levels and ratios because (surprise!), music also follows fibonacci rations. More on that here.


The Cool Video

Chris Cole, mentioned and quoted above, had the lovely idea of turning the data of volatitity for a bit more two decades [1990-2011]. If you can watch this and tell me there’s no rhythm to the stock market….I don’t really have a counter argument. That’s because I think it’s self-evident enough in the video. Here, take a look  and see what you conclude.

Mind slightly blown? Yeah I thought so. If you want to read some more about volatility, the article that accompanies the video is a must-read in my opnion; you can get it off the Artemis website here:

The point of this entire post, in summary, is two-fold. First off, a rise in volatility doesn’t necessarily mean the end of the world on the horizon. And after watching the video, if you didn’t notice then go back and look at it again, but $VIX is far from the best hedge out there. My favorite hedge are long-dated index or sector ETF puts depending on how my portfolio is weighted at that point in time.

So there you have it, a better grasp on volatility. Don’t let them fool you intro thinking it’s fear in the market.
Think the “hedge” indicator or just a more or less meaningless indicator. It does have meaning as defined by the equation but I’d rather use it as a. short-term thing to inform me on how far dated I should buy my options or use the moves of the the VIX futures to trade index futures.

Happy Trading.



Today in hsitory, the first Earth Day was held in 1970. While I think the impact of human beings on global warming is a bit overstated….I do think we should take care of our planet before we destroy it. Most of us will not be going to Mars to try to colonize it. Even despite my reverence of the quiet ; that’s a bit too much isolation for even me. So let’s just take care of our home.


Near Space photography - 20km above ground

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