Thursday, March 5, 2009

Thinking About VIX in relationship to return (close to close daily return) and high to low range

Meaning of this chart:

As a general rule, once the market does its 'range' -- the odds are that price will recover by the close to something significantly less than which VIX implies.   But beware, this is a frequency distribution -- meaning that while you have odds of recovering back towards the previous days close, when it does not -- you could have a large move relative to what VIX implies (fat tail risk).  Notice the more symmetrical shape (though still skewed) of the relationship of Range and VIX Implied Vol vs the fat-tailed  'close to close return'  relationship with VIX Implied Return.

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