Should VIX Really Be a Trading Tool for the Masses?

by: Richard Kang

A few quick points here:

  1. I’m not as excited as I once was to post something about me on TV or video.
  2. I could say it’s simply lost its appeal but frankly I feel like whatever I say is surely going to be irrelevant by the next day.
  3. If you’re reading this post and today’s date is past July 16th, 2008, the video I refer to below is no longer available for viewing.  Sucks to be you cause you would have made a mint no matter what I said in point 2 above.  I know you trade on what you just heard from the Boo-Yaa guy on CNBC.  You think I don’t know?  Joke stops here but when you consider the amount of trading software commercials on that channel, you have to stop and wonder.

So anyway I was invited to speak on BNN on Wednesday.  BNN’s our version of CNBC in the great white north and BNN stands for “Business News Network” … yeah … I know … “Business News Network” … classic.  Don’t know why but for some reason I didn’t think about posting it until now.  Well, to be perfectly honest, for anyone with even the most basic self-education on VIX, there will be little new in this clip (after the short ad, scroll forward to just past the 29 minute mark and I’m on for about 7 minutes).  So again, if you’re reading this post a few days after I’ve posted it, you’re really not missing much from the video.

Funny that BNN called me on Tuesday to talk about VIX but due to a busy schedule I couldn’t make it that day … luckily we were both good for the next day. Tuesday’s close for VIX was somewhere around 23, a low for the past few weeks.  And they wanted to know why it wasn’t up over 30 given the market declines in those same past few weeks.

Bottom line: Should VIX be somewhere closer to 30?  Probably.  But being down where it was on Tuesday/Wednesday and given how volatile VIX is (volatility of volatility?!), well geez Louise, where are we now?  Here’s the one week chart:

So VIX came pretty darn close to 30 and if it does in the next day or two, does that mean all’s well with the planet again?  Come on … rules of thumb rarely apply and if there’s one place they basically never apply, it’s in VIX land.  Positive or negative correlations (like the kind I mention in the clip) exist for many relationships but can’t be construed as solid rules of thumb that necessarily can be relied on with a great level of confidence.  If you want to trade on generalizations, that’s fine but when things don’t go as expected (i.e. when you switch from paper trading to real trading), investors shouldn’t be surprised when things go astray.  That’s the beauty of life and the real art and science of trial and error.

Makes me think about middle school algebra when we first were introduced to variables.  Like “VIP,” VIX should mean “Very Important X” or variable.  It’s important, VIX is, because it can give clues to other important things just like the unknown variable in high school math.  But it’s not much later in our young academic careers when we realize that sometimes we can’t solve for X.  I don’t know about you, but a lot of the math courses I took didn’t end with X=3.  It was more like an equation where X equals some formula.  And that was even before calculus and statistics.

Thus, you have to wonder if VIX as a trading instrument is something for the masses.  Perhaps it’s best to be used as a signal for trading SPY or its inverse ETFs (or S&P futures or some other derivation of this strategy).  Trading VIX, whether via existing options or futures, or perhaps one day by way of an ETF, could be an area of exploration for hedge funds, day traders and various short-term active managers.  But with all the rules of thumb I hear and [false] expectations that “VIX should be at whatever”, if it were really that easy, why don’t we have an actively managed fund (mutual fund or hedge fund) that focuses entirely on trading the VIX?  Maybe there is one and if so please let me know.  I’d be interested in seeing its performance record.