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January 8th, 2008 at 12:20 am
Great Post.
A few notes:
1. VIX is an estimator that takes as inputs the current market prices for all out-of-the-money calls and puts for the front month and second month expirations. The goal is to estimate the implied volatility of a synthetic, at-the-money option on the S&P 500 index, with 30 days to expiration.
http://en.wikipedia.org/wiki/VIX
Why do I need to know this? Because VIX is a calculation on the S&P500, not the DJIA. So when you’re making projections from the VIX, you should extrapolate them on the S&P500. Unless you assume the S&P is highly correlated with the DJIA, which in most cases it is.
2. In 2003 the VIX has been revised. It’s not wise charting on data before that.
3. http://web.mac.com/dem_z/PSW/80108/VIX.png combined with http://thinkthoughtinnovation.com/Blog/DemetriusMichael/wp-content/uploads/2008/01/picture-120080107233617.png
suggest it’s an up day tomorrow.
I never thought of actually drawing on VIX charts for perspective and I must credit you for that. Thanks!
And c’mon Tom you can’t possibly say it’s impossible to know the future. That’s like Opt’s logic. To know what’s going on tomorrow is simply a matter of knowing if Housing will beat the -0.7% estimates, and the technicals. If housing comes in bad, then it’s over for America.