Courtesy of Adam Warner at Daily Options Report
VIX at 30 Theme Party Continues
Looks like the VIX poundage thru 30 has inspired all of us to opine on the topic. Here’s Jared from Condor Options.
- Absolute VIX numbers don’t communicate much of anything, especially since the VIX is nearly impervious to technical analysis. In another time, another era – namely, 2008 – a VIX at 30 was widely viewed as a sign of panic and capitulation, i.e. as a signal that equities may be due for a bounce. Today, that same 30 handle is being touted by some as a sign, not of panic, but of confidence gradually returning. Neither interpretation is particularly sensible if based solely on the quoted value of the index.
- Spot VIX relative to longer-dated implied levels – like VIX futures, VXV, and the new ETFs – can be meaningful, but really only when the ratio of short and long term levels reaches an extreme, and even then usually only for a quick trade.
- It’s always helpful to know how tomorrow’s implied volatility stacks up against today’s realized volatility. A 30 VIX is a cause for concern if the prior 30-day realized volatility was in the neighborhood of 15, but not if realized and implied vol are at about the same level.
Couldn’t agree more.
I believe the last point is the most relevant if you want to judge whether options are a net buy or not. No one knows what realized volatility will be going forward, so we get our best cues from the recent past. And if 30 VIX was in an environment of 15 realized volatility and there’s no cosmic news expected on the horizon, odds are that it’s overpriced.
As to the ratio between the VIX and various futures or longer dated volatility measures like VXV (the 90 day VIX), just be careful. Like Jared says, this is a quick trade. And a disciplined one I would add. Consider last fall when the VIX ran way ahead of the futures et. al.
The chart above shows the ratio of VIX to VXV over the past year and a half. And you can see that generally speaking, 1.10 is a good signal for an overbought VIX, while .90-.95 signals oversold.
Except one really big bad signal in late September 2008.
It’s also important to note that the VIX and the market are not perfect inverse correlates. Sometimes an oversold VIX just resolves in time. In fact that’s often the case. And could in fact be happening now. We do have an oversold VIX by most metrics, and I do expect it to resolve soon. But I’m not convinced it heralds the new bear market. At least not starting tomorrow. Complacency can often linger.
