Schaeffer's Trading Floor Blog

The VIX Rally Will Happen Tomorrow

Analyzing the all-too-familiar VIX term structure

by 7/25/2013 7:27 AM
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Big rally in the CBOE Volatility Index (VIX) yesterday! All the way to well, it's still on the low side, historically. But it's more than 9% above Tuesday's low!

How about a little VIX check?

Yes, the VIX is low. But keep in mind -- it is summer, and the VIX is almost always low in summer. Especially in the "July" part of summer. August, on the other hand, has seen occasional VIX surges. In fact, we saw one just two short years ago, as the VIX doubled from late July into early August. (Click the charts below to enlarge.)

Daily chart of the VIX Since April 2013
Chart courtesy of TD Ameritrade

I'm not at all expecting a double in August, but a lift wouldn't be shocking. The VIX has dropped pretty precipitously. It had a high tick of 21.91 on June 24, and as you can see on the chart, it's pretty much made a lower low almost every day since then.

It hit 12.07 on Tuesday, the worst reading since April 12. It has spent every session since June 25 between its 10-day simple moving average and its lower Bollinger band. Mean reversion generally entails at least some time above the mean. After all, the mean itself keeps dropping too, becoming a much lower hurdle to cross.

VIX futures continue to believe in the rally "tomorrow." And three months from "tomorrow," and six months, and so on. Here's the term structure, courtesy of VIX Central:

VIX current term structure since August 2012
Chart courtesy of VIX Central

If it looks pretty familiar, well, that's because it's almost always the same. Here's yesterday's term structure compared with the term structure on April 12, the session before a large VIX pop.

VIX Term Structure, Now Versus April 12
Chart courtesy of VIX Central

The slope is pretty identical, but absolute levels are modestly higher than they were the last time the VIX was about here.

The VIX shot up over 17 on April 15 (it was the day of the Boston Marathon bombing). If we compare the term structure that session to yesterday's session, we get this:

VIX Term Structure, Now Versus April 15
Chart courtesy of VIX Central

Pretty amazing. Out 60 days and beyond, our term structure now looks just as it did on a day of a historically huge VIX pop. So either VIX traders are over-optimistic today about future VIX lifts, or they were pretty confident on April 15 that the VIX lift was just a blip.

Well, with the benefit of hindsight, we know they were correct in April. VIX quickly gave back most of its gains.

Going forward from today, it's pretty likely we'll see sporadic VIX lifts in the next six-to-nine months. We always do. But it's also likely that those will prove to be blips, and owning long-dated futures at large premiums to the current "cash" VIX will prove ill-advised.

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


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