Why the VIX Index may be Flawed (Street View)
In my last post, Financial Markets Outlook for 2017, I covered this topic, but only in broad terms. In this post, I’m making my Case, with a deep dive into the VIX Index and Risk Analysis, in order to “convince” you why the VIX cannot be trusted anymore and you need an alternative, to help protect your investments in 2017.
A Deeper, Wider Perspective on the VIX Index, and its Flaws
My first Objective is to prove that the VIX Index has been providing wrong information all these years. And to prove that the VIX Index not only provides information that is pretty useless to “Analyze Risks”, but may be providing misleading information as well, perhaps unintentionally. If I’m right, this just makes a better case for “Believe in Nothing. And Question Everything in 2017″. I used to love the VIX, so I’m disappointed myself for coming down hard on it. But You gotta do what Needs to be done.
Right about now, the thoughts crossing your mind could be
- Who is this CrackPot undermining the VIX Index, the most watched index after SPX
- Why am I even Reading this, or watching these Videos
- Please inform him the 2008 crisis is History. Resolved. Over.
Fair enough. I understand your Point. But that’s exactly my Point. I want to break down these stereo-typed Myths, a Human Flaw. And hopefully convincing readers that indeed it’s time to Question Everything. The 2008 crisis was ultimately resolved by “Printing Money on an Astronomic Scale” If Money Printing could solve even a third or even much less, of Mankind’s problems, why don’t we just do it indefinitely, and in fact why didn’t we do it all this time.
We don’t do it because Printing money Does Not Solve Problems, It just Kicks the Can down the Road. A crisis like 2008 doesn’t come and go for free. There’s always a Larger Price to pay, once you add Interest, Penalties for breaking Rules, other Flagrant violations of the underpinnings of Finance itself, and a whole lot more.
So, please hear me out first. This is NOT the time to forget about 2008, in fact it’s The Opposite. We should look back, analyze and understand 2008 even better. 2017 could be a PayPack Year. More ducks are lining up each day. I’m not looking for a nod of approval or acceptance at face value. But if I can convince you to Buy into the case being made here, that’s good enough for me. After Part III, coming in a few days, if you can at least, say “Hmm.. Plausible”, I’ve made my case and done my part, Fair enough ?
Just like the Defense Counsel needs 1 vote of Reasonable Doubt, I need only 1 vote out of 12, to cross the “Bar Of Plausibility”.
Understanding Risk Contexts and Frameworks
This Post (as it has evolved) is not really about the 2017 Outlook or making Predictions, or a Doomsday scenario. Instead, it’s meant to start looking at this stuff from a serious angle, and even among the Mainstream population. And we MUST Be Prepared. If “Reasonable Doubt” exists, rational thinking demands that it be given the appropriate mindshare, along with Solutions. If the Bar of Plausibility is crossed, just like a jury of 12 in a criminal case considers Reasonable Doubt, in our case being applied in the Opposite context, then its a credible scenario. Why this method holds good (and why Systemic Risks should be analyzed in this narrow Context ) is best explained, with this hypothetical scenario, which is insightful into how people make Rational Decisions.
Rationality Test Case (SkyDiving)
You’ve been offered (along with 999 others) to win $1 Million, with no questions asked.. IF:
- You Are Prepared to SkyDive on your own.
- Knowing This Fact to be the Unquestionable Truth and Reality
- That 1 out of the 1000, is Guaranteed to go down the Path none of us want to think of.
- But Only one, no more, no less. So the Probability of going down is (1 / 1000) or o.1%
- Will you TAKE this Deal or NOT...and…WHY or Why NOT..
Results of the Rationality Test Case
I think the majority of us would say "NO Deal". But Why...
Because even though the Probability of the Event happening is 0.1%, it's Too Risky.
What ?? 0.1% (or 1 in 1000) is too Risky now, Since when....
And then the Reasons became Clear:
Low Probability or Not, The Outcome is Unacceptable
Aha, clearly a Light Bulb moment. Probability being low is Not enough. Right ?
We also need to also consider "Consequences" or "Outcomes"
Excellent ! Please Hold this KEY thought until Part III.
Because this concept is "Central" to understanding Risks and Rewards, on Any scale.
By the way, this is nothing Profound, in and of itself. This element is already present in Probability and / or Statistical Analysis. It's called the "Expected Value" of a certain outcome, which clearly adds a new dimension, and an important one at that. But let's Hold this for now until Part III. Because the reasons 2008 snowballed into an uncontrollable monster, is exactly due to this concept.
VIX design, Why it is Flawed, and even Misleading
With the above background, I'm going to get with the VIX Index, the Lowest Level of Market Risk, and work my way upwards to Part III. This Post will be controversial, because of the VIX's following, including myself for over 5+ years. But this is 2017. The Year to "Believe in Nothing, in fact Question Everything". I'll also be revealing a very interesting "Personal Experience in 2008" anecdote in Part III.
Let's jump right into the Street Level view of Risk, which most Retail Traders will confirm t0 be the VIX Index. The video below explain everything in Detail, with supporting evidence that confirms that, regardless of what a large group of people, even some experts say or think, we must "Question Everything".
Free Vix Course - Understanding the VIX, aka Fear Index
As a reader of this Post, I'd like to offer you the above mentioned VIX mini-course for FREE. Its a 1-hour long course and explains the impact of VIX levels on Option Prices, and rapidly changing sets of Trade strategies, for these conditions. Critically, what happens during a Crisis to Option Prices, Calls and Puts is very interesting. Although there are some overlaps, there's a lot of Extra Material in this course
Sample Video of the VIX Course
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