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Could somebody help me understand if the VIX is a leading or lagging indicator.

From the CBOE whitePaper ( https://www.cboe.com/micro/vix/vixwhite.pdf). I've understood that the VIX tries to calculate the 30 day expected volatility.

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This would make me assume that it is a leading indicator looking ahead. Yet the calculations happen on the time that the options are available. Meaning as soon as there is new information this will change and so will the VIX.

Example nobody (some better than others maybe) see a market downturn in advance when the VIX is still nice and smooth. Then when disaster strikes the VIX goes up which leads me to believe that it is a lagging indicator.

Could somebody help shed some light on this for a very confused person.

Thank you so much in advance!

P.S this might be a real dumbass question but if the VIX has a more or less known lower limit then why not keep going long on it until it eventually spikes?

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    $\begingroup$ Regarding your second question, to gain exposure to VIX you actually have to trade futures on VIX. In order to maintain a constant exposure until the VIX spikes, you need to be rolling over your futures position. VIX futures normally trade in contango (see this page, tab contango), which means that the value of your position gets eroded little by little. Even if VIX finally spikes, your position might have eroded so much that it's no longer a profitable trade. $\endgroup$
    – Daneel Olivaw
    Apr 24, 2020 at 20:59
  • $\begingroup$ Thank you that is very clear, I mean if you want to gamble on it wouldn't a stop order do the trick to get rid of the erosion factor? $\endgroup$
    – Jorisdrees
    Apr 24, 2020 at 21:17
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    $\begingroup$ I am not sure what you mean by "get rid of the erosion factor". So let us say you open the position, put a stop loss and wait for the VIX to spike. If it does not spike, your position will probably be losing money daily due to contango and the stop loss level would be hit. Then what do you do? You simply stay on the sideline now that you've exited the position? I don't think a stop loss is a good way to manage the contango cost. Anyway, because it is so expensive to keep it open, a strategy based on buy-and-hold is not feasible, you can only take this kind of position for very short timespans. $\endgroup$
    – Daneel Olivaw
    Apr 25, 2020 at 2:16
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    $\begingroup$ You need to think of the contango as a cost of maintaining your trade open, as if it was interest you are paying. $\endgroup$
    – Daneel Olivaw
    Apr 25, 2020 at 2:18

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In the sense it's derived from option prices and reflects investors expectation, it is a leading indicator.

if nobody sees a market downturn in advance, then the option prices wont reflect such expectations and thus the VIX is still nice and smooth.

Then when disaster strikes, not only the current vol increases, it also changes the option prices and hence the VIX goes up.

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    $\begingroup$ I agree that the VIX is forward looking, or if you prefer a leading indicator. So it anticipates things that the market knows about; however a lot happens that human beings simply have no idea about (As a famous chap said with some exaggeration the expected never happens; it is the unexpected always), so in some sense it is only a weak leading indicator with limited insight into the future. $\endgroup$
    – nbbo2
    Apr 24, 2020 at 21:06
  • $\begingroup$ strongly agree ! well said. $\endgroup$
    – ProbNerd
    Apr 24, 2020 at 21:10
  • $\begingroup$ Thank you very much guys! $\endgroup$
    – Jorisdrees
    Apr 25, 2020 at 7:53

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