Don't Hold Your Breath for a VIX Pop

Based on how the CBOE Volatility Index (VIX) has performed on a historical basis, the next few months may bring little volatility

Dec 28, 2015 at 9:53 AM
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It's hard to believe we have another year about to hit the books. They go faster every year, which I guess is because it's always a smaller percentage of our lives. But hey, I promised no math! Instead, let's look at a picture.

I bet you were curious about what a typical year in the CBOE Volatility Index (VIX) looks like. Well, here's the average VIX reading for each day of the year. My VIX data goes back to 1990, so coincidentally (or not) I set the X axis to read as 1990 dates, but it's actually the average of all first trading days of the year, second trading days of the year, and so on, to the average of all 252nd trading days of the year. There were actually a few 253rd and 254th days, but not enough, and they distorted the chart in a non-representative sort of way, so I eliminated those. Anyway, here's how it looks:

151228Warner

It's a bit as we would expect. VIX typically troughs in late June. Anecdotally, from my years as a floor trader, the stretch between June expiration and the July 4th holiday is the slowest time of the year, and it makes sense that it's also the least volatile. VIX then starts to lift, peaking in early October. We don't see an autumn VIX blast every year, but when we do, it's often a doozy. That's followed by the gradual drop back to norms at the end of the year.

If there's one thing I find surprising, it's that we don't see another trough in late December, and then a bit of a spike into mid-January earnings season. It really just gets back to equilibrium at the end of the year, then just stays in that range, on average, for the first few months of the new year.

If it's a typical year, then what you see in VIX right now is basically what we're going to get for the next few months. And that is something I wouldn't find shocking at all. Realized volatility picked up recently, but that's starting to fade already, and seeing 10-day realized volatility settle back in the 12-15 range seems about right. Add some premium to VIX and mid-to-high teens seems reasonable, too.

I'm not saying we won't see spikes in the first quarter of 2016. I mean, who really knows? The timing is unpredictable by definition. I'm just suggesting that I expect us to see VIX around these levels, for the most part.

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

 

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