Editor’s Note: On August 24th, 2015 – almost exactly five years ago – we had a fla
Invisible Threads: Matrix Edition
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This commentary is being provided to you as general information only and should not be taken as investment advice. The opinions expressed in these materials represent the personal views of the author(s). It is not investment research or a research recommendation, as it does not constitute substantive research or analysis. Any action that you take as a result of information contained in this document is ultimately your responsibility. Epsilon Theory will not accept liability for any loss or damage, including without limitation to any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Consult your investment advisor before making any investment decisions. It must be noted, that no one can accurately predict the future of the market with certainty or guarantee future investment performance. Past performance is not a guarantee of future results. Statements in this communication are forward-looking statements. The forward-looking statements and other views expressed herein are as of the date of this publication. Actual future results or occurrences may differ significantly from those anticipated in any forward-looking statements, and there is no guarantee that any predictions will come to pass. The views expressed herein are subject to change at any time, due to numerous market and other factors. Epsilon Theory disclaims any obligation to update publicly or revise any forward-looking statements or views expressed herein. This information is neither an offer to sell nor a solicitation of any offer to buy any securities. This commentary has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Epsilon Theory recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial advisor. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.
Thank you for this
I’ve wanted to run a years long thought experiment past somebody that knows more about this than I do for a long time. Finally, here’s the appropriate forum.
You hear the VIX called the “fear gauge” all the time, but that’s not really what it is. VIX is calculated using SPX options quotes, which are in turn determined by a pool of market makers. There is no such thing as a supply/demand price in this market. Next, because of the rules dictated by the fed on options trading, small/dumb money are net buyers of options, and large/smart money are net sellers of options. So, what we know from these two things put together is that the market makers set the price of the SPX options, and the market makers are net sellers of SPX options. So, how do they determine the price to set? Same as anything else, you charge what the market will bear.
VIX isn’t a “fear gauge” at all, its more like the VIG. It’s the price market makers charge to maintain an orderly market. When markets are boring, the VIG is low because there are fewer net buyers, and when things get weird, they just simply charge more for their services.
I have no idea what volatility curves are telling me, but I knew enough to know to build a program that web scrapes the data and sends me a graph twice a day. Maybe glancing at these graphs for a few more years I’ll finally learn something. The only thing I know so far is that it’s astoundingly unfathomable that there are fewer than 5 firms on this planet that have absolute control over the price of nearly everything, and they were given that authority by the people that make the rules of the game.
Interesting stuff. As the markets drift further away from what this relatively unsophisticated investor knew as “fundamentals,” it’s become harder for me to spot the proverbial sucker at the table when I sit down to play. At least I know what that means.
This sent me straight to “Boulevard” by Jackson Browne which makes for a very good entrance to the day. Thanks Ben!
need to add a new paragraph for Robinhood and Softbank . . .
Absolutely right!
You’ll have to subscribe to ET Professional for that!
Good call.
I would subscribe to ET Pro, but I lost all my discretionary income when I started trading short-dated, way OTM calls on TSLA this week. But Robinhood let me trade them for FREE, so I got a great deal!