VIX: Nothing to See Here, Folks

Will the CBOE Volatility Index (VIX) drift through November?

Nov 13, 2014 at 8:26 AM
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There's one more byproduct of the Great Volatility Collapse of November 2014 that we haven't touched on lately. That is realized volatility (RV).

Way back about four weeks ago, RV boomed. Remember those days? ISIS was going to cross our borders infected with Ebola as part of a grand plan to end quantitative easing -- or something like that. Anyway, we were extremely worried about stocks.

On Sept. 2, 10-day RV in the SPDR S&P 500 ETF Trust (SPY) checked in at 3.4. A reading of about 16 means we're ranging about 1% on a typical day in the sample. So, 3.4 translates to about a 0.2% move, which in hindsight sounds almost impossible; it was certainly unsustainable. Part of that number has to due with the calendar: those were the end of summer snoozefests, after a pretty tame August.

Volatility started to pick up slowly in September, with 10-day RV peaking at about 12 late in the month. That's not a huge number, but at least it correlates to 0.75% SPY ranges, which is fairly normal. And then we spiked. The CBOE Volatility Index (VIX) peaked on Oct. 15 in the low 30s. Realized volatility, by definition, lags (it looks backward). It peaked at 19.5 on Oct. 21 at 22.2, by which point the market had already turned and the VIX had tanked. And now, we're sliding back down Backward Volatility Mountain. Ten-day RV has steadily descended as the rally pace has slowed. We now sit under 7 -- roughly 0.4% market range. Same as it ever was.

I can't emphasize too often that VIX looks forward, and RV calculates backward. But they don't ignore each other. VIX averages about a 4-point premium to RV, typically more when RV is very low. You're never going to see VIX at 7 or 8, for example, but we've seen RV under 4. Right here, right now, VIX has a 6-point premium. I'm not going to say VIX is "high" here, but I will say it's pretty fair in this snapshot in time. Earnings are mostly done, the midterm elections are behind us, the Fed has spoken, etc. And the market is back in rally mode. There's no particular reason for VIX to sit modestly elevated versus RV, so it's more about the absolute value of VIX now than anything else.

And don't look now, but we're only two weeks from the long Thanksgiving weekend. VIX might drift a little on that alone. But otherwise, prices look pretty average in the bigger picture right now. VIX futures (of course) maintain their premiums. So, nothing to see here. Move along.

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


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