Breaking Down the Second-Largest VIX Storm on Record

History doesn't repeat itself perfectly, but the current VIX explosion resembles what we saw in 2011

by Adam Warner

Published on Aug 25, 2015 at 7:58 AM

So you think we make a big deal about CBOE Volatility Index (VIX) moves here? Maybe we err on the side of not giving it enough value:


I'm not sure where to start on this one. Here's my favorable interpretation: Perhaps in 2008, there was a time where VIX was high and the economy was weak, and someone's mistaking a concurrent event for causation. Here's my unfavorable interpretation: Um, what? Did someone really say that? Maybe they lost their job at Barclays for blaming VIX for employment dips.

Anyway, what is there really to be said about yesterday's trade that hasn't been tweeted 500,000 times already? I focus on VIX because, hey, that's what I do -- I have an options and volatility background. But you didn't need a VIX in 1987 to tell you the market and market volatility had gone insane. Again, VIX didn't exist yet. Any numbers I provided, and numbers others provided, are backdated calculations of where VIX would have been then. Remember, it's just a calculation. It's a formula based on the implied volatility of the underlying. In 1987, that underlying was the S&P 100 Index (OEX); now, it's the S&P 500 Index (SPX).

No, the market didn't make anything close to the percentage move it made in 1987. Volatility -- as gauged by VIX -- did, however. At its high of 53, it was about 280% above its 10-day simple moving average. That's about where it closed on the crash day of '87.

It's apples to oranges -- CBOE OEX Implied Volatility Index (VXO) methodology to VIX methodology, OEX underlying to SPX underlying -- so it's not an exact comp. But it's close enough, and let's get something straight about all these ratios I throw out there: I use them to make comparisons and so on. They give generally good guidance, but like anything, they can go haywire. There's no natural support or resistance in a ratio -- particularly one that's comparing one math calculation to another. It's a good indication when a move has gotten extended, but as you can see, it's not gospel. Nothing is ever gospel.

Why use ratios and moving averages as opposed to absolute numbers? Well, think of VIX as proxying the degree to which the market prices in a certain move. At 16, VIX basically prices in moves of about 1% in the market. Thus, when the moves go beyond that bound, someone's getting squeezed. When moves go way beyond that, the squeeze is exploding.

The moving average of VIX gives you a modestly better guide of what's really priced into the market. It's the "mean" to which we expect reversion at some juncture. When VIX itself gets stretched from that mean, it's a good proxy for the degree of squeeze on the shorts. Most of the time that runs its course -- but on rare occasions, it has the exact opposite effect, and compounds and compounds the short options' pain. This is clearly one of those times. That's why, to me, this VIX storm is the second largest on record, surpassed only by 1987, even though VIX itself is not historically high.

History doesn't repeat so much as it rhymes a bit. It's really not 1987 anymore. For one thing, my kids aren't much younger now than I was then, which is a strange concept. For another thing, the Mets aren't the defending World Series champs, nor are the Giants defending Super Bowl champs. Come to think of it, bring back 1987!

Actually, 2011 is probably a better parallel. VIX had a bit of a higher baseline, and didn't move quite as rapidly, but it did lift from 17.5 on July 22 to 48 on Aug. 8, while the market dropped 16.5%. We remained shaky for the next three months, and briefly made lower lows in October, and then the rally eventually resumed. It sounds like a realistic template for what we might see going forward now.

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


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