Tuesday, March 19, 2013

VIX - If You Believe in Convergence (as History has Proven); Either a Higher Vol of VIX (and Higher VIX) or Lower. What's Your Best Bet of Those Two?

The VIX spot is quoting at 14.63 with IV30™ up 1.9%. The LIVEVOL® Pro Summary is below.


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[VIX] is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking and is calculated from both calls and puts. The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge."
Source: Investopedia

This is a follow up to the story I posted on 3-14-2013 (i.e. five days ago). You can read that post here:
VIX - Spot Hits Six Year Lows (2007); What Integer Comes After 2007?... Somethings You May Not Have Realized About the Vol of the Vol.

From 3-14-2013 article:
This is a depressed price note, which when referring to the VIX is in fact a depressed vol note. Said simply, the VIX is now at levels it has not seen since February 2007. By the way, what's the integer that comes after 2007? I always forget...

The bottom line is, if the VIX continues to move at these HV levels with the spot already at six year lows, we will either see substantially lower VIX than we see now, substantially higher VIX than we see now, or a VIX spot that moves up and down rather abruptly, but stays around this current level. Let's see if someone asks what the next integer after 2013 is in a few years.

3-14-2013 ---------------------->  3-19-2013

We can see the VIX is up 30% in five days and the vol of vol is up 15%. Ah, but the market is down, so that's all that's happening, right?... Well, no... The SPY closed at $156.73 on 3-14, and went ex on a $0.694 dividend on 3-15, and as of this writing is trading at $154.33. In English, the SPY is down just 1% after the divi is put back. So a 1% drop in SPY = 30% rise in VIX and 15% rise in vol of VIX? No... there is something else, and it's more than Cyprus.

Rather than get into a bunch of analysis which would be pretty speculative at this point, I just want to put the same stats and images from 3-14 next to the ones today.

Let's start the two-year Charts Tab, below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).



Things to note:
1. The rise in the VIX (duh)
2. The rise in the implied of the VIX (also duh)
3. The gap between the IV30™ and the HV180™ has closed a lot BUT the gap between the IV30™ and the shorter-term HV measures has closed much less.  In fact, it's nearly identical for HV20™.

Here are some comps:

IV30™: 79.53%
HV20™: 156.45% (+ 76.9)
HV180™: 105.17% (+ 25.6)

IV30™: 91.25%
HV20™: 168.11% (+ 76.9)
HV180™: 105.56% (+14.3)

So what do all these silly little numbers mean?

The VIX is popping, the vol of the VIX is popping, the market is barely down at all relative to the moves above, and the implied of the VIX is still trailing the historical short-term measures by about the same amount.  So, the VIX is not stabilizing (per HV20™)...  The last time the IV30™ spiked to reach the HV20™ was 12-28-2012, and VIX rose to 22.72% from 15.57% in 17 days.

That means, if you believe in an eventual convergence of HV20™ (the blue-line) and IV30™ (the red-line) as history has proven, then we either see a higher implied vol of VIX (and higher VIX) or lower.  What's your best bet of those two outcomes?

I say a reckoning is coming.  At least in the short-term.

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1 comment:

  1. This is the end of the volatility as we used to know it. We will forever see sub 20 VIX levels because of unconditional support from central banks. Additionally, we have this about to happen:

    "On April 8, the SEC and the major U.S. exchanges will start rolling out a program called "limit up-limit down" that will pause trading in a particular stock for 15 seconds if its price falls outside of a normal range of 5% to 10% from the last trading price. If trading doesn't revert to a normal range, trading will be paused for another five minutes, similar to the current circuit breakers. "