Schaeffer's Trading Floor Blog

No Need to Fear the Current VIX Low

Time Has Warped Our Sense of a High and Low VIX

by 1/22/2013 8:05 AM
Stocks quoted in this article:

On Friday, the CBOE Market Volatility Index (VIX) hit 12.5, the lowest reading and close for Our Favorite Sentiment Indicator since June 2007.

As we showed last week, it's not as silly low as meets the eye when you relate the VIX to the 10-day realized volatility in the S&P 500 Index (SPX).

And, as Bill Luby demonstrates, it's not even silly low relative to itself. He has created an inverse VIX, basically so he can chart it side by side with the SPX -- remember, the actual VIX moves in opposition to the SPX. He then looks at the VIX in percentile terms relative to VIX readings over the course of forever. And … well, I'll let him explain.

The way to think about the inverted percentile VIX is in terms of the lifetime of VIX values, in which a VIX of 12.50 is in the 12.2 percentile. The inverse of that is the 87.8 percentile, which corresponds with a VIX of 28.67. Now I am guessing that for most investors a VIX of 12.50 feels much lower than a VIX of 28.67 feels high. Statistically they are almost identical in terms of being outliers, so if a 28.67 VIX doesn't sound like a scary high number, then a VIX of 12.50 should not sound like a scary low number that is reflecting too much complacency.

Now our perception of moves is clearly not symmetrical. A high VIX brings out strong emotions, and generally resolves quite quickly. A low VIX defines complacency, and can linger forever.

But that's not the important point here -- it's the levels at which VIX gets high to begin with. Pre-2008, VIX had spent relatively scant time above 30. And then 2008 happened and VIX managed to stay above 30 from October 2008 until May 2009, far and away a record (if memory serves me correctly, three months straight above 30 was the previous record). Since that period is still relatively fresh in our memory bank, it warps our sense of high and low.

Prior to 2008, the VIX acted pretty similar to the way it does now. It dipped below 20 in November 2003 and only blipped above briefly before it started an uptrend in February 2007. The 12.5 mark was on the low end then, too, but just the low end of a rather unexciting range, not some sort of historic shorting opportunity in the market. In fact, the market rallied pretty steadily over that whole time frame.

Options certainly are cheap at these levels. And no one will ever argue against doing things like replacing stock winners with cheap calls at times like this. Or simply buying cheap put insurance. It's just not some magical, fade-able moment here; it's just a low ebb on a downtrending volatility market.

Oh, and I would be remiss to not always bring up the iPath S&P 500 VIX Short Term Futures ETN (NYSEARCA:VXX) in discussions such as this. It's record remains in tact -- all-time lows every day in 2013. That won't persist forever. Probably. But keep in mind the VIX futures curve is steep again, February/March trades for $2, and April closed Friday at a $4.5 premium to the VIX. And VXX is a math concoction, so while the VIX itself can get cheap on a relative basis, the VXX never can; it's just a number that's not comparable to other VXX readings.

Disclaimer: The views represented on this blog are those of the individual author's only, and do not necessarily represent the views of Schaeffer's Investment Research.


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