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Invisible Threads: Matrix Edition

Editor’s Note: On August 24th, 2015 – almost exactly five years ago – we had a fla

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  1. Thank you for this

  2. 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.

  3. 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.

  4. This sent me straight to “Boulevard” by Jackson Browne which makes for a very good entrance to the day. Thanks Ben!

  5. need to add a new paragraph for Robinhood and Softbank . . .

  6. Avatar for bhunt bhunt says:

    Absolutely right!

  7. Avatar for bhunt bhunt says:

    You’ll have to subscribe to ET Professional for that!

  8. Avatar for bhunt bhunt says:

    Good call.

  9. 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!

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