 Hey everybody, welcome to the video on the Wix and why it may be flawed. Now, the Wix index is very popular and obviously achieved cult status. I don't know if most people realize its flaws by design and also by its implementation and even the results actually. So let's go ahead and take a look at all of these issues in this video. My name is Hari Swaminathan and I've been trading options for about 10 years now. I've been self-taught in the sense that I'm not coming from Wall Street background. I also founded optiontiger.com in 2012, about five years old now. On my website you'll see the complete roadmap from a beginner to very advanced levels on options. I also quickly want to show you my Udemy channel. Udemy.com is the leader in online courseware. And here I have about 26,000 students, 24 courses and about 2,500 reviews and most of it is all four star and five star. And these are all the courses that I have over here, including the course on the Wix, which is what I was going to give everybody for free. That's right there. So let's talk about the Wix index itself. So the Wix was originally designed after the Black Monday 1987 October when the Dow Jones crashed 22% in one day. So ever since then they were looking for some kind of a reliable volatility indicator and they decided on something called the Wix. And its official role was the volatility index and that's where it gets its VIX name. And over time they also started calling it the fear index. All options would need an underlying asset and therefore the closest one they could find was the slash VX, which is the futures. First of all, in its role as the volatility index, which is its primary and official role, it comes out zero. And I'll show you why I think it's zero. Then in the role of the fear index does a pretty bad job, but I'll give it 50% on that on that front. And then there are various other factors as well, smaller, but ultimately does result in some bad information coming from the Wix. And ultimately that does impact especially retail traders and investors because that's the only one they look at is the Wix index for any kind of fear. But let's go look at all these details as we go along. So from its design itself, the design was to make it a volatility index because they felt that they needed a new market barometer for something called volatility after the October 87 clash. Then over time it developed its nickname as well, the fear index. And now these are the important things to understand. The Wix itself is not tradable like the SPX. The SPX is also not tradable, but its options and futures are and that's why they went with the underlying for the Wix as the slash VX, which is the futures. Now the way the futures are structured is they only give you like three month contracts in the future. So right now maybe they will have one for February, March and April. The Wix itself is calculated based on the somewhat around the second month. In the mid period of this three month risk horizon. And so the Wix basically looks at on average about 1.5 months into the future. So that's its first shortcoming, I think. I mean, if you're going to look at the Wix as a measure of underlying fear in the markets, I think we can all agree that 1.5 months is not at all a good horizon at all. In fact, we have to go much, much more than that. And then in the design of the Wix itself, call options are completely ignored. So apparently volatility depends only on the downside and not the upside. I don't even know why they put it that way. I guess that tells you that it was being designed more as a fear index than the volatility index because volatility has to be represented of both sides, I think. So the average true range, for example, is indicator that's available, that looks at both the upside and the downside. And in this case, the Wix just doesn't look at the upside at all. So without calls, how can we think of this as a volatility index? I fail to understand that. Then the futures, as I mentioned, the futures also have its limitation being that it's only three months ahead. And the futures behave very differently from the Wix. So it's not actually correlated. So this is the recapping of the volatility. It does not consider call options. The Wix value is based on SPX puts demand only, which I should add. Calls increase due to the math imbalance. So there's something called a put call parity relationship. And all options have to comply with that rule because it's all mathematical at the end of the day. So because of the put call parity relationship, the call options will increase in value when the stock is actually going down. So that's again another sort of indicator that something's not right with this thing. This gives rise to arbitrage opportunities, but these will be immediately closed down. It'll be open for a few seconds maybe and a few people might take advantage, but mostly it'll get closed right away. Now let's look at it as a fear index. It does a pretty bad job. I would say it's 50% at best. That's because of the risk horizon. I mean, it's only about 1.5 months. And so what happens after one and a half months? We don't know. So it installs fear for all the wrong reasons. And yes, it does calculate a little bit of fear index, at least for the short term. So I'm giving it a 50% credit on that. It so happens that the Wix index is pretty much the only indicator available to retail investors and traders when they're using options. Because of all these inconsistencies with its design, its structure and its implementation, they tend to give you wrong results. And unfortunately, the retail folks have nothing to go by except for the Wix index. And now we'll also look at the Wix of the Wix. So I'm talking about the volatility of the volatility index itself. So and you'll see that that is pretty much unbelievable. And we'll also look at the flash crash day, which is in May 2010. And where within 20 minutes, the SPX crashed 100 points, got it all back within the next hour and became a pretty costly learning curve for many, for many reasons, not just the Wix. And let's be clear, the Wix did not cause this one. But it's the way it behaved that day could have resulted in at least the retail traders who are looking at the Wix at that time face some losses there. So let's go over to the thinkorswim platform, introduce many elements in your mind that fundamentally it's not designed for volatility. It's more of it is designed for fear rather than volatility. So anyway, let's take a look at these examples on the platform. You can see it in the flash crash. And that happened in May of 2010, I believe to be clear, the Wix did not cause this flash crash. But with its behavior that day, it did mislead some investors. You know, the whole thing was that it went up and down so quickly, like this is the actual chart of the S&P going down. Up till here, it was like a normal breakdown. So the market was a down day that day. And somewhere around here, it started collapsing, in fact. And then it goes all the way here and then it comes back. And at the close, pretty much where the collapse started. And so this is really a very interesting thing that happened. And even the CBOE says it climbed over 40, which is a level not seen in more than a year. This kind of vicious turns tend to give the wrong answer because it first of all blows the Wix above normal on the upside and as well as the downside. So it's basically overreacting on both ends. And it caused a lot of grief that day. Then what happened was I wrote this post and actually this became the number one post on Google that time. And I checked it now it's still the number one on this area, which is stop loss and flash crash. This one was read by many lawyers as well. And they started calling me and if I knew any customers who had been burnt by this, I didn't have anyone personally. But I knew that there were plenty of them out there. And so I included their names and things like that. And I believe they've got like 300 cases going, these people itself. So anyway, so these kind of small things, the Wix can have an impact. And then this article came on CNBC just last week, you know, second Feb 2017. The headline was Wall Street's Fear Index hits its lowest level in a decade. And it's unclear why. So this is a pretty funny statement. There's a lot of irony to it that something strange happened to the fear index. It fell and broke below 10. Now this is the first time it's broken below 10 since 2007. And then, of course, all the blame game starts that, you know, blame it to an algorithmic glitch or some other anomaly. But, you know, it's difficult to pinpoint the exact cause. So this is the point. It can behave unpredictably at certain times. I want to quickly show you on the Thinkorswim platform. If you look at this chart, here we are showing the slash VX futures. And here we have the Wix index and both these charts are for the last 10 days at 30 minutes each bar. Same thing here as well. And you can notice this is, of course, the day that they're talking about, even on the CNBC article where it went down below 10 for no reason. But that same day on the slash VX, you'll see there's no movement at all. And there's really nothing there at all. This causes misleading information, especially when it's a sudden event like that. And then, of course, you'll see even the rest of the graph, there is not real consistency. I mean, if you see here, now the Wix is going down here, it's actually, you know, on the VX, it's actually going up. And so what kind of an underlying and what kind of an option relationship is this? It's certainly one that cannot be trusted because the future is working a different way. So for example, if there is an event tomorrow that is expected to cause some volatility, like let's say the election results or something like that, then the Wix futures will actually not show, may not show any sort of increase in the value for the slash VX because we know that the futures expire at the end of the month. And so tomorrow being not the end of the month, completely skips any events that happens tomorrow. So there's a lot of flaws like that in the index itself. Now, this is also even the last day here, that is on Friday, this past Friday, if you look at the price action. So here the VX futures seems to have dropped a lot. And if you look at the, on the last day of the Wix, it's increased correspondingly, but just the other side. So it's, you know, it's actually correlating inversely. So these are all the small problems with the Wix slash VX in that relationship itself. So, you know, that's at a design level. You design it based upon a certain underlying. And if that relationship itself is not found to be valid, then we have a problem here. Now, I just want to show you the volatility of the Wix itself. So basically what we'll do is, okay, so here we have the Wix itself for the last 10 days, whatever. Now, if you go to see the option chain, so the option chain will be under analyze and we go to add simulated trades. So what you're seeing here is the Wix option chain, okay. So it's the Wix option chain. Now, if you've seen this platform before, then it may, you may clearly understand it. If not, let me just briefly tell you, this is the date of expiry. It's going to expire in a couple of days from now. And this one's going to expire nine days from now and so on and so forth. So this is the option chain going far out into time. Now, the other thing noticeable is this is the value of the volatility of this particular series. So that's 128 and the one expiring in nine days is 100%. And you can see generally it's like 100 plus 100 or, you know, 190s, 80s, you know, that's where the general volatility is. So what does this tell you? This is telling you that in this, in the next two days, it is expected to move almost 128% of the value. I mean, that is just crazy. So this is what we call volatility of the volatility index, right? That's what we're looking at. We're looking at the volatility of the volatility index itself. And that's 128%. I mean, that is just absolutely crazy. So which by itself tells you there's something wrong with the volatility index because the volatility of the volatility index should be a lot less. I mean, certainly not over 100%. And so, you know, that's another clue that there's something. I'm not trying to say that there's anything intentional happening. I'm just saying it's, you know, the factors that have gone into the VIX are just not right. And therefore they're going to produce the wrong numbers and therefore the people that are looking at it for trading or investing triggers, they're going to be doing the wrong thing. But I think with this basic video, I hope you go over the understanding that the VIX has a number of issues with it. Really, this VIX cannot be trusted. It's not giving us the right information. It doesn't look past one and a half months. Its core relationship with the, with its underlying, which is the slash VX futures doesn't always work. In fact, sometimes it works inversely. And there's lots of other issues as well as mentioned in this video. Anyway, I'll conclude here now and we'll get back to on part three that's coming up in a few days.