Posting about vix, ... (as i am here to learn,so plz comment seniors)
First about vix ,its volatility index started by nse from April 08 based on methodology of CBOE vix of American market.Why I use vix?answer is I regularly write options( on my dads long term invested stocks ..ex. ashok leyland,hll etc.. ) so naturally i was concerned about implied volatility,as its very important for option trader....so my lot of set ups are related with o.i.,vix,put call ratio along with age old indicators.And it gives pretty good idea where the smart money trading.
Basic idea of vix is using it against popular belief that low vix( aka fear index) means low fear and so healthy for markets and vice versa.I use exactly apposite of it.
My rough back testing results
1)As you can see in above chart when vix was at its highest ( in between 11/7/8 to 13/8/8)market made important bottom of 3800 at jul end which is still holding.
2)In btwn 20 aug to 28 aug vix also made a small spike,that time market made short time support of 4250,market bottomed out from 4250 and touched 4550,
3)Now i am waiting for vix to rise and give us a reliable base,but vix is not yet broke previous aug high.
Laymens logic about VIX ... When implied volatility or vix rises, it indicates the weak hands getting scared and getting out of market cuz of herd mentality/tall on patience/disbelief etc...and when those weak hands wiped out,what remain is a residue of strong hands and so market made a strong bottom.We call the VIX as shaking out index.
I have high regards for S.Patra( economic times )who using vix divided by put call ratio( not o.i. put call ratio,two things are very different)and made his own indicator and as by his indicator,i mailed him two three times but didnt get a reply
I also use vix in context of open interest and open interest in put call ratio( another time i will write about o.i. p/c ratio)
Now we havent broke the prev vix peak and its totally new for me how things will shape up, for me today i felt we saw enough of volatility and we may bit cool off,but while posting saw s & p closed 50 points up,dow 450 up,so a gap up tomorrow ( might be ideal short on 4250 level initiated).. interestingly US vix made year high of 39 yesterday and today we saw a huge rally in s & p, that means s & p made a bottom yesterday!!( sorry cant help looking at s & p as my cousin lives in US & he trade in s & p and i trade in crude oil, we usually linked )
Also it is applicable for top out.indian avtar of VIX wasnt present when we at 6k nifty levels around nov,des 07,but i bate vix must be at its highest level ( i remember once i wrote near month call at hopping 300 rs. !!!)and we saw a major top as weak shorts wiped out and market gone in to strong shorts( technically fii were not allowed to short at that time, so we can say unwinding of long positions by fii,dmi,hni)
