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CBOE volatility index

  • This topic has 23 replies, 5 voices, and was last updated Apr-17 by Snippy.
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    • lulu123
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      Alright so maybe this is really minor in relation to the stuff we have to know, but nonetheless I want to understand!

      On page 639 of book 1 CFAI it explains the CBOE volatility index (VIX)

      It is stated that (1) “the VIX rises when market participants become fearful of an impending market decline”

      Then it says (2) ” when other indicators suggest that the market is oversold and the VIX is at an extreme high, this combination is considered bullish”

      From statement (1), I understand that a high VIX indicates a bearish market because we are fearful of a DECLINE.
      Why then in statement (2) it says that a high VIX points toward a bullish market???…

      Could somebody clear this up for me por favor? Muchas gracias

    • Snippy
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      @lulu123, I think what they are trying to say is that a high VIX indicates a bearish market, but it is often held true that technical analysts interpret this high VIX in a contrarian way and hence see this bearish strategy as a bullish sign.

    • Sophie Macon
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      @sidmenon’s right.

      It’s a contrarian play. They believe that market indicators oscillates within a certain range, and if out of those range it is oversold or overbought. Therefore they view that if VIX is extremely high, the underlying asset is probably oversold (everyone selling stock, or buying put options), therefore they take the opportunity to buy those stock as they view it as oversold/undervalued.

      Generally high VIX indicates uncertainty / bearish market – contrarians use technical analysis to try to gauge how much is too much and take the opposite view.

    • lulu123
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      @sidmenon @sophie

      so am I supposed to look at all such indicators as contrarian? I just looked again and there is no sub-heading specifying that the following would be contrarian lol and not in every paragraph do they even mention contrarian logic (ex: not in the VIX one haha)

      thus, how do I know to think direct or contrarian?

    • Sophie Macon
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      I’m afraid you have to look at the question itself @lulu123. If there’s any hint of using technical analysis, extreme volatility and/or statement that indicate the analyst thinks it’s overdone – that’s it. you have to read carefully, but now that you get the concept it’s not hard, just a matter about being careful when reading.

    • Snippy
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      @lulu123 Like @Sophie correct stated, you will have to look at the question. I can give you an example of a question which I came across in the latest practice exam i wrote.

      Q. A contrarian technical analyst is most likely to be bullish based on a:
      A. low put-call ratio
      B. high volatility index
      C. low mutual fund cash position

      And the answer is B, which we know because of our discussions till now.

      So I guess you don’t have to worry too much, they might not ask twisted questions when it comes to this topic.

    • lulu123
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      @sidmenon @sophie

      so for that particular MCQ, does it mean that for

      A) low put-call ratio –> less puts on the market than calls –> people unwilling to sell –> bullish –> contrarian analyst will think bearish

      B) high VIX –> bearish market –> analyst will think bullish

      C) low mutual fund cash –> low cash for purchase –> cash was used up in “bullish” market (?? am I right on this interpretation?) –> analyst will think bearish

      IN OTHER WORDS, the analyst will take the indicator, and interpret it the opposite way? is that it?

    • Snippy
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      Yep. You are right. The analyst interprets it in the opposite way, hence the term contrarian strategy.

    • Snippy
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      @Sophie I don’t want to start another thread so i’ll ask you here itself. Are investment grade bonds which are BBB- and above, less riskier than BB rated bonds or more riskier? I’m a little confused.

    • lulu123
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      @sidmenon

      BB is better than BBB so they would be less risky I believe

    • Sophie Macon
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      Hey @sidmenon, @lulu123 – it’s less riskier. The pecking order is obviously from alphabetical (for best to worst rating), but BBB is better than BB, for example.

    • lulu123
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      @sidmenon @sophie

      woops, I meant three letters is better than two, thus it’s also less risky
      = BBB is less risky than BB

    • Snippy
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      Ah, okay. Thanks @Sophie and @lulu123!

    • Sophie Macon
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      No problemo @sidmenon ~O)

    • lulu123
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      ooh coffee! just had some @sophie

      and no problemo @sidmenon, you make me review at the same time!

    • lulu123
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      ps: I didn’t mean to say “no problemo” the exact same way as @sophie LOL just realized it after the fact

    • Sophie Macon
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      lol I know you’re a fan @lulu123! 😛 Great minds think alike really 😉

      Yea, I have a cuppa every morning

    • Snippy
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      Haha, i also say no problemo all the time, sounds different in my head 😛

    • lulu123
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      @sidmenon

      different?

    • Snippy
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      I say it in a semi-spanish way inside my head :))

    • Sarah
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    • Zee Tan
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      @diya so basically everyone thinks alike…?

    • Sarah
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      @Zee I’ll let you take it any way you’d like…

    • Snippy
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      No, actually, everyone doesn’t think alike. They are differentiating people into two categories, one who remember just the first part of that quote and the second who remember the whole quote. Out of these two, which is great and which is simple, well, that is completely subjective 😛

      P.S. I tend to get more and more random as exams approach.

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