The VIX: Analyzing 'The Big One'

VIX skyrocketed during a short week and amid a seasonally quiet time of year

Jul 6, 2015 at 9:09 AM
facebook X logo linkedin


I hope everyone had a fun week last week. As I noted recently, we were in a somewhat extended period since the last "Official" CBOE Volatility Index (VIX) Pop. But, since it was a pre-holiday week amidst the worst time of the year for volatility, I took a few days off. Hey, what are the chances the Vol Pop happens right before July 4th?

Apparently, about 100%. We've had Greek news and deadlines and threats and counter-threats and threats to the counter-threats for five years now. But this turned into The Big One.

There's no certainties to any of the "predictions" we all make. At least, there shouldn't be. In the real world, we deal more in probabilities. You will make money if you find situations where there's a disparity between the expected probability of an event and the probability the market assigns to that event. For the lion's share of the last six years, the market has consistently overpriced the odds of an imminent volatility pop. By and large, it pays to fade that overpricing. 

But that doesn't mean those Vol Pops don't happen. They always do, and clearly when I least expect them. I did expect one sometime in the next couple of months; I didn't expect one last week. 

Anyway, at least it gives us a good excuse to open up the VIX Pop Table! Just to refresh, I use "20% above the 10-day simple moving average (SMA)" on a closing basis as the official definition of an Overbought VIX. And below is a rundown of Overbought VIXes since 2009.

I include the one-month and three-month returns of a long initiated at the close of the first session VIX closed 20% above its SMA, as well as returns of a long that's closed after the first session where VIX closed below its 10-day SMA. Also, I note the duration of that trade (in trading days) as well as the duration from the first Overbought VIX until the nearest SPDR S&P 500 ETF Trust (SPY) bottom. If it's zero, the first day of the Overbought VIX was the bottom. I also include the mean and median one-month and three-month returns of trades initiated on any random day since 2009.

 

150706Warner

 

As you can see, fading Overbought VIX has been a generally good idea over the last six years -- at least in the near term. Buying and holding until VIX closes back below the 10-day has had a median return of 0.84% with an average holding period of slightly over a week. Further, the trade "won" 12 of the last 15 times. 

Going a little further out, holding for a month has had a median return of 4.08% vs. 1.61% on randomly timed one-month holds. It's also on a nine-"game" win streak, albeit with the tiniest of wins last July. 

By three months, the Overbought VIX has no real impact on returns. I can take a rose-colored lens to that, though, and point out that anyone who tells you the VIX pop "predicts" future doom and gloom in the longer term needs to show some real data to back those assertions up. 

Oh, and a reminder: I don't want to double-count data, so the blanks on the table are to avoid overlaps. 

It's important to note that all of this looks back on an era that we know in hindsight was a bull market coupled with a low VIX "regime." We don't know that's the case going forward, of course. One of these VIX pops will "stick." Maybe it's this current one, though as always, it's way tougher to call a change in trend than it is to simply stay on the same path. 

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.
 

Target Effortless Triple-Digit Gains Every Sunday Evening For Life!

This is your chance to triple your profit potential on Sunday evenings, without spending all your free time watching the market.

On Sundays, as a Weekend Plus subscriber, you’ll get up to 6 trades every Sunday, each targeting gains of 200% or more.

Start targeting gains like the ones our subscribers have seen recently, including:

213.3% GAIN on AutoNation calls
100.0% GAIN on Monster Beverage calls
100.4% GAIN on Walgreens Boots Alliance puts
100.4% GAIN on ON Semiconductor calls
257.7% GAIN on Dell calls

101.0% GAIN on Apollo Global Management calls
103.6% GAIN on JP Morgan  Chase calls
105.3% GAIN on DraftKings calls
101.3% GAIN on Airbnb calls
203.0% GAIN on Shopify calls
102.0% GAIN on Cboe Global Markets calls
100.9% GAIN on Boeing calls
102.1% GAIN on Microsoft puts
102.3% GAIN on First Solar calls
101.5% GAIN on PulteGroup calls
101.0% GAIN on Apple calls
209.4% GAIN on NXP Semiconductors calls
100.8% GAIN on Uber Technologies calls
100.4% GAIN on Academy Sports and Outdoors puts
102.2% GAIN on Trade Desk calls
100.8% GAIN on DoorDash calls
100.0% GAIN on Camping World Holdings puts
100.0% GAIN on Cboe Global Markets calls
100.2% GAIN on C3.ai calls
238.5% GAIN on Oracle calls

 
 
 


 
 

Rainmaker Ads CGI