Here is some recent Vix discussion from the trading room :
The excerpt in unedited and recent :
[10:55] Shai C: a higher vix and lower price is actually a false notion of the mkts
[10:55] Shai C: does not happen all the time
[10:56] Lingaraju Haralahalli: Shai, I fully agree on that
[10:56] Shai C: maybe when people buy and sell india volatility, the corelation will be better
[10:57] Chandra Shekhar: LH… just read something on nseindia online. It is computed from option prices itself. So it should be higher because option writers are asking for higher prices and buyers are paying those prices.
[10:57] Lingaraju Haralahalli: But the VIX stops rising or falling whenever indices are abt to reverse their direction many times
[10:58] Chandra Shekhar: those of you who may be interested, here’s a small writeup with a link to bigger paper … http://www.nseindia.com/content/vix/India_VIX_comp_meth.pdf
[10:58] r m: VIX is calculated from Option premium volatility so the pain to writers means higher VIX
[10:59] Lingaraju Haralahalli: Yes may be even with wild nifty movements. But to calculate VIX as per option premiums defeats the very purpose
[11:00] Shai C: agree
[11:01] Shai C: and considering how lopsided the option mkt is, it fails to impress as a lead indicator
[11:01] Chandra Shekhar: LH… according to my theoretical knowledge, volatility is calculated over historical data but market is interested in future volatility which is better reflected in current prices at which options are getting traded.
[11:02] Chandra Shekhar: no doubt if markets are not liquid and highly competitive, such calculation based on recent premiums would tend to become meaningless
[11:02] Lingaraju Haralahalli: Yes it is playing into the hands of Option writers/market makers
[11:03] r m: @CS, it is calculated on the basis of near and next series Out of Money option spreads
[11:03] Lingaraju Haralahalli: All in all there is no level playing ground in options mkt
[11:08] Shai C: http://www.scribd.com/doc/19240573/Volatility-Index
[11:08] Shai C: another paper on india vix
[11:11] Lingaraju Haralahalli: Yes RM. You r right. There is no evil in the methodology. But we are entitled to a volatility index which will reflect on the Index movements as the presenr VIX as Shai rightly said fails to impress as a lead indicator.
[11:12] Chandra Shekhar: thanks Shai… that’s a good paper
[11:13] Chandra Shekhar: LH… I believe a lead indicator is just a dream. Volatility calculated with historical data is far removed from current conditions. Atleast VIX is based on current market quotations. There is nothing else really
[11:16] Lingaraju Haralahalli: CS Yes it makes sense. Agreed