VIX Call Buying Could Signal More Choppiness to Come

The S&P 500 tends to struggle when VIX call buying sees dramatic spikes

Senior Quantitative Analyst
Apr 27, 2022 at 8:25 AM
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There was a buying spree on Cboe Market Volatility index (VIX) call options recently. The buy-to-open (BTO) call/put volume ratio spiked above five for the first time since just before the pandemic. Those call buyers have been spot on since the spike occurred just under two weeks ago; the VIX is up 30% in that time frame. Next, I’m going to look at past spikes to see how the stock market and VIX behaved afterwards.

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VIX Call Buying Spikes 

Going back to 2010, there have been 33 other times that the BTO call/put ratio on the VIX spiked above five (I only consider one signal over a month time frame). The table below summarizes how the S&P 500 performed following these spikes. The second table shows typical index returns since 2010 for comparison. Stocks tended to struggle after these signals. A month after these signals, the S&P 500 averaged a loss of 1.08% with barely half of the returns positive. Compare that to the typical one-month return, which is a gain of more than 1% with 68% of the returns positive. Six months after a signal, the S&P 500 averaged a gain of 2.5%, which still underperforms compared to the usual return for the index of about 6.5%.

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Since stocks tended to underperform after these signals, it’s not a surprise that the VIX moved significantly higher on average. A month after a signal, the VIX has been higher by about 30% on average. After that month, the VIX tends to hang around that elevated level based on the three and six-month returns having a similar average return.

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VIX is Above 20 

The recent signal is abnormal because of the level of the VIX. On the date of the recent call-buying signal (April 14), the VIX closed at 22.70. It’s the only signal out of 34 which occurred with the VIX above 20. The signals tend to happen with the VIX just above 13. The table below shows the 10 signals with the highest VIX reading. Nothing jumps out to me about these returns compared to the returns after other signals, but VIX call buyers might require more conviction for their trader given the already high VIX levels.

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Finally, here are the VIX returns after the signals that occurred with an elevated VIX. Compared to other VIX returns after a signal, the VIX is more likely to fall (the percent positive is lower) but its spikes tended to be much higher (higher average return).

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