Volatility For Dummies

It’s a gorgeous summer day in Los Angeles and I apparently have nothing better to do than to think of new ways of entertaining my stainless steel rats – shame on me. I am not complaining however as I am a market megalomaniac on a mission – hey, that has a nice ring to it! After Volar’s volatility post I perused many articles and papers regarding various measures of volatility now offered by the CBOE (and others) and soon realized that there may be much confusion on the subject. Do you fully understand how each volatility index works and how they differ from each other?

I didn’t think so! Which is a situation we ought to remedy once and for all. Due to some ancient genetic mutation common in my germanic tribe I happen to be obsessed with clarity and order. Thus I felt strangely compelled to produce a post that puts various measures into their respective context and more importantly assesses their real value. After all we are all about edge here at Evil Speculator. So, today I have a special treat in store for you which called for an appropriate cover page:

That’s right – the ultimate reference on what makes the VIX, VXN, VXD, VXO, SKEW, VXV, etc. tick – special digital edition for intrepid disciples of the evil lair:

Charts and commentary below for anyone donning a secret decoder ring. If you are interested in becoming a Gold member then don’t waste time and sign up here. And if you are a Zero subscriber it includes access to all Gold posts, so you actually get double the bang for your buck.

Please login or register for Zero Data Feed (non-recurring) or Zero Data Feed (recurring) or ES Gold (non-recurring) or ES Gold (recurring) or geronimo/ES (recurring) to view this content.

This entry was posted on Sunday, August 21st, 2011 at 6:53 pm. Both comments and pings are currently closed.



  • Anonymous

    Wow – nice timing.  My Sunday read. Thanks Mole.  Interesting stuff.  Will re-read again tomorrow.

  • nyse

    This is really great and well-timed. Have a good night, Moleski.

  • http://twitter.com/ShortStrangles Elias Jerrold

    I must admit that I am one of the “Dummies” .
    Thanks for the informational piece.
    Keep up the good work !

  • Anonymous

    Thanks for much needed education on this topic, Mole! The SKEW-VIX chart alone is worth the subscription. Please update us often ;) 

  • Anonymous

    ES bottomed at 1111.25 it seems to me…up tomorrow..

  • Anonymous

    ES bottomed at 1111.25 it seems…up tmrw likely..

  • Anonymous

    Wow Mole! I’ll bookmark this one

  • Anonymous

    Possibly… if we bounce and stay below 1175, i’ll be looking to add some shorts. If we go down tomorrow, 1090 seems to be a strong support.

  • http://evilspeculator.com molecool

    Five hours to put that one together – so yeah, you better! ;-)

  • http://evilspeculator.com molecool

    Chew on this guys:

    http://www.bloomberg.com/news/2011-08-21/wall-street-aristocracy-got-1-2-trillion-in-fed-s-secret-loans.html

    Plus we have an SEC intentionally deleting case files after rejecting investigations. Ask yourself how much that has cost you personally in terms of government services (i.e. education, infrastructure, investment in your kid’s future, etc.) that you will never ever receive. 

    The unmitigated looting continues day after day after day after….

  • http://evilspeculator.com molecool

    Is everyone dead?

  • Anonymous

    Mole Ester – LOL

  • Anonymous

    Peculiarly, FTSE up, although /ES futures not gone up, and UK banks (RBS) still down

  • Anonymous

    Just noticed it. LMAO!

  • Anonymous

    Ok, my chart was faulty, /es has gone up, somewhat

  • Fearless

    Looks like I will have all of my positions green. Sadly, no chance for me to back up the truck. If we open above 1140 we should have a trend day. Might be too late for a good BTFD entry.

  • Anonymous

    Got a nice entry -1 on /GC this morning. See where it goes:)

  • Anonymous

    Quite likely that today will be an up trend day. Whether we are in a downtrend or uptrend we are due for a bounce. Enjoy your (day?) profits. 

  • http://practicalt.blogspot.com/ Gold_Gerb

    No, but someone is.
    Apparently this venture capitalist had some ‘severe financial difficulties’.

    I bet he was leveraged long when the bottom fell out.

    http://www.vancouversun.com/entertainment/Real+Housewives+suicide+pushes+back+season+premiere/5279519/story.html

    ..and don’t tell me she looks like your EX.

  • Anonymous

    Work is blocking this post, has someone put up a dodgy comment recently?

    Anyway, is this a dead-cat bounce? Lets look at the evidence…

  • raised_by_wolves

    Bull trap?

  • Kudos

    Does this type of market remind anyone else of 2008? Burst of energy (positive price movement) to generate trading volume, and then a slow fade to drain the pool of whatever money isnt holding long term. 

  • Fearless

    Reduced long by half.

  • Fearless

    Reduced long by half.

  • http://practicalt.blogspot.com/ Gold_Gerb

    IMHO, this Market is heading toward the colon.

    http://tinypic.com/r/33bpmpf/7

  • http://practicalt.blogspot.com/ Gold_Gerb

    IMHO, this Market is heading toward the colon.

    http://tinypic.com/r/33bpmpf/7

  • Schwerepunkt

    When the BBs narrow, will it be sphincter time? 

  • http://practicalt.blogspot.com/ Gold_Gerb

    Not sure.

    I skimmed a book this weekend -
    “A Tough guy has balls, a Smart guy has crystal balls” – Mafia Rules

  • nyse

    Good luck!

  • nyse

    Mole, looks like your silver target of $44 from a few weeks ago (when it bounced off the lower BB) turned out to be good. Well done.

  • Anonymous

    SO, this isn’t the trend day mentioned earlier, is it?

  • Fearless

    No. It could be an inside day before further selling tomorrow.

  • Schwerepunkt

    Fins rolling over

  • http://evilspeculator.com molecool

    Me.

  • Anonymous

    Hi Folks, I am more of a medium to long term trader, but have been doing PM’s since the late 90′s (I was in prfts yrs B4 Gordon Liddy ever smelled his first gold commercial).
    If silver (eventually)  breaks through heavy resistance at 44, it could hit the 50′s by the end of the year, even 60′s.  Fractals on monthly chart since 02 show the way.  OTOH, that could be the last run even if it is a great one.  
    Not a prediction just a heads up, my silver target for the recent move that is just now starting is 67.14, but that could take up to a year…

  • Anonymous

    Mole, that was a great commentary on volatility.  Printed it, saved it.  A concise distillation, great job!
    The last few weeks have paid my subscription, in my mind, out for years to come because of the quality work you and volar et al have been doing, thanks.

  • Anonymous

    Don’t know what to say after the first two and a half hours except that the early action made me pucker a bit.  

    I closed out my my protective Weekly SPY OTM Calls for a 50% Loss but they served their purpose.   

    My SPY Short ETF Stock Position and Long SDS ETF Stock Position are still in place. 

    In hindsight, with the VIX and IV as high as it is, I would have been better off Shorting the ETF SH to reduce my Negative Delta over the weekend instead of buying Weekly Calls.  After it looked like this was a Gap and Crap this morning, I could have covered the Short SH for a profit instead of taken a loss on my Call Protection.  Oh well, I’ll file that under the “Coulda, Woulda, Shoulda Column.  

    If given another opportunity under similar circumstances that’s what I’ll do.  

    As of 12 Noon the profits on my shorts have been restored after disappearing for awhile so I can’t complain.   :)

  • Anonymous

    Don’t know what to say after the first two and a half hours except that the early action made me pucker a bit.  

    I closed out my my protective Weekly SPY OTM Calls for a 50% Loss but they served their purpose.   

    My SPY Short ETF Stock Position and Long SDS ETF Stock Position are still in place. 

    In hindsight, with the VIX and IV as high as it is, I would have been better off Shorting the ETF SH to reduce my Negative Delta over the weekend instead of buying Weekly Calls.  After it looked like this was a Gap and Crap this morning, I could have covered the Short SH for a profit instead of taken a loss on my Call Protection.  Oh well, I’ll file that under the “Coulda, Woulda, Shoulda Column.  

    If given another opportunity under similar circumstances that’s what I’ll do.  

    As of 12 Noon the profits on my shorts have been restored after disappearing for awhile so I can’t complain.   :)

  • Anonymous

    SPX 1122 test and off we go! Anyone going to BTFD? Just dipped my toe. The loss of a toe doesn’t hurt to much:)

  • Anonymous

    SPX 1122 test and off we go! Anyone going to BTFD? Just dipped my toe. The loss of a toe doesn’t hurt to much:)

  • Anonymous

    SPX 1122 test and off we go! Anyone going to BTFD? Just dipped my toe. The loss of a toe doesn’t hurt to much:)

  • Anonymous

    Ok, in the bigger picture how can we decide if we are making a MT/LT bottom (and resume uptrend), or if we are headed further lower

    (nb see long comment from The Fearless One, prev post)

  • Anonymous

    Kudos, Mole, 
    Chart wise there are a lot of similarities to 08, but a couple of large differences.  One is sentiment, there was little sentiment for a crash in the summer of 08 besides the normal few permabears and $vix ran from 16 to 30.81 and then back to 18′s b4 the bottom started falling out in Sept 08.  Now there is a LOT of negative sentiment.
    08 was a funny year election cycle wise as the market started falling before the election (lame duck??).  Be interesting to see how this election cycle year turns out, maybe another ‘indicator’ that doesn’t work anymore.  

  • Anonymous

    I don’t know Sky, that could be a good move for a quick trade.  

    I’m a little more slow so I’m waiting to see if price crawls back over the 1133.37 Daily Pivot on the SPX Daily.   We’re also about 8 Points under VWAP on the ES at this moment so I’m being little extra cautious.    

  • Anonymous

    Bobby,

    The 2 scenarios that I am watching right now are:
    a) a wace c of abc to complete wave 4
    b) Completion of a 5th to complete this first leg.

    Either way ST looking for more retrace north soon before the big one to start;)

  • Anonymous

    looks like a range day. which is somewhat logical from the “what would fuck the most traders” perspective. and some degree of indecision at inflection point is also logical.

    interesting stuff going on with gold. I am watching 175 Sept GLD puts, which are trading at 2.55 @ GC 1884 and were trading at 2.30 @ GC 1878.

  • Fearless

    We don’t know, that’s why you place your bets based on the probabilities. I reduced my longs by half by closing out short term long positions. My invalidation points are 1084 (or DJIA 10430) and 1273. Below 1084 we’re in solid bear market, above 1273 Prechter needs to be taught another lesson.

    If we don’t close this week strong, I would reduce the probability of new all time highs even further.

  • Anonymous

    With sentiment as low as we see right now just doing the opposite of everyone else:)

  • Anonymous

    well, this looks like just an EMA20 visit on 5 min chart. It can still go over, but a strong push will be required.

  • Anonymous

    this cud be the buy buy buy time..

  • Anonymous

    Looks like the “Market” is “Jonesin” for a POMO Fix.  

  • Anonymous

    Everyone on this board is GUESSING and GAMBLING from what I gather today.  We are paying for the ZERO, and so far, the ZL5min is slightly to the bearish side…with a trend day down…….SO FAR….

  • Anonymous

    Past trhee weeks VIX has made lower highs with a BIG double top in place:)

  • Anonymous

    yes, “slightly”. that means, a range day is quite possible today, if only ES gets over EMA20 on 5 min.

  • nyse

    GG, your fan has been holding up pretty well (http://screencast.com/t/Zjkj3rqUu), but you already knew that…

  • Anonymous

    Thanks Fearless.
    Will have to re-read your long comment again!

  • Fearless

    If we don’t make new lows on the next hourly candle we ‘should’ be blasting off after 2 pm.

  • http://evilspeculator.com molecool

    Agreed – doing a post now.

  • http://practicalt.blogspot.com/ Gold_Gerb

    yeah.  SPY broke the upward fan, hit the large descending fan, and is (now) trying to climb up today.

    kind of confirms my 114 Friday hunch.
    the 112 115 whipsaw gives me heartburn.

  • nyse

    Puke zone!

  • http://practicalt.blogspot.com/ Gold_Gerb

    XLF, anybody looking at the daily?

    right on the edge.  all inside candles to the 8th.

  • http://evilspeculator.com molecool

    ????????????????????????????????????????­???????????????

    N   E   W    P   O  S   T  !   !    N   E   W    P   O  S   T  !   !   N   E   W    P   O  S   T  !   !

    ??????????????????????????????????????????­??????????????

  • http://evilspeculator.com molecool

    ????????????????????????????????????????­???????????????

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