the bid/ask when uncertainty increases to
give herself more room for error. The average changes to 0.60. And that 0.05 increase
in the option’s average price percolates
through the VIX calculation and pushes
it up. When this happens across all SPX
strikes, the impact on the VIX can be large.
That’s why the VIX is so sensitive to the
When the VIX goes up, but SPX doesn’t
move, it can seem nonsensical. Why is
volatility (“vol”) increasing when the market isn’t doing anything? It’s market makers
signaling increased uncertainty. Or the SPX
and VIX might drop a bit, too. That’s just
market makers “taking their bids and making them offers,” as traders used to say once
Now the huge VIX swings in the first six
weeks of 2018 start to make more sense.
After the tax reform bill in late 2017, the
market felt good. SPX market makers
believed there’d be less uncertainty and
lowered their bid/ask prices to entice
traders. In February 2018, increasing bond
yields threatened inflation and sent stocks
lower. This spooked market makers, so
they increased the bid/ask prices of the
out-of-the-money (OTM) SPX options and
widened the spreads. That combination
increased the average SPX option prices
and sent the VIX soaring. In the end, the
market took a deep breath, stopped falling,
SPX options dropped, and that pulled the
VIX back down.
Watch SPX options closely, along with
the VIX, and you can see this behavior in
live, streaming data. Believe it or not, it’s
fun! —Words by THOMAS PRESTON
Thomas Preston is not a representative of
TD Ameritrade, Inc. The material, views, and
opinions expressed in this article are solely those
of the author and may not be reflective of those
held by TD Ameritrade, Inc.
For more on the risks of trading and trading
options, see page 37, #1– 2.
THINK TANK • EASY
FIGURE 1: Parabolic SAR. Source: thinkorswim® from TD Ameritrade. For illustrative purposes only.
HERE’S HOW TO FIND I T (FIGURE 1).
1 – From the Charts tab, enter a symbol and bring up a price chart.
2 – Select Studies, and from the dropdown menu, select Add Study, then All Studies,
and find Parabolic SAR. You’ll see the dots displayed on the price chart.
3 – Observe ho w the dots are belo w the price bar in uptrends and above them in
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Wanna know the short-term momentum of a stock? The parabolic
SAR “stop and reverse” indicator may provide a clue. If you bring up
a price chart on thinkorswim® and overlay the parabolic SAR on the
chart, you’ll see a series of dots above or below the price bars. These
dots trail price movement
One popular use of the parabolic SAR is to use it as a trailing stop-
loss level. In an uptrend, parabolic SAR will continue to rise along with
prices. Once the trend reverses and price falls below SAR, it indicates
the start of a downtrend and the dots will be above the price bars.