Are We In a Volatility Trough?

Is the VIX 'high' even at year-to-date lows?

Feb 23, 2015 at 9:27 AM
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So, if all the market needed to make new highs was having me leave for a week, I'd have done this sooner. In fact, I'd have taken off for all of 2015!

Remember that volatility everyone was talking about? Not so much anymore. Ten-day realized volatility in SPDR S&P 500 ETF Trust (SPY) now sits below 8 -- its lowest level since back on Dec. 9.

CBOE Volatility Index (VIX) hasn't gone quite as long since seeing current levels, as it's back to Dec. 24 pricing. But remember, that's often an artificial reading right before a holiday, so we'll say it's pretty similar. Take away the holiday blip down and VIX is right where it was on Dec. 9 as well.

You can even make the case that VIX is high. It's a 6.5-point premium to realized volatility, versus a typical premium of about 4 points.

That's not unusual if realized volatility is very low and/or there's some expected news on tap. But neither is the case right now. The current "story to end all stories" is Greece, and that's now apparently on hold for four months. Earnings are mostly reported, there's no Fed news imminent … though we do have Yellen answering some always insightful politico questions this week on Capitol Hill. And realized volatility isn't particularly low, it had a full of "3" at times last year.

All clear on the Western front then, right? Well, the tradable VIX complex still hasn't given up the Volatility Ghost just yet. Here's the VIX term structure now versus Dec. 9.

VIX term structure, Dec. 9 vs. the present

The slope is similar, but it's about a point higher across the board, with a nearly identical reading in VIX itself. And now we're back to some impressive bid-ups as you go out in time. Go all the way out to October and VIX trades near 20.

In other words, we're back to the same old same old from the last few years. If VIX is in the mid-to-low teens, it clearly must be going back to the high teens. That's normal VIX!

Except as we noted a couple of weeks ago -- it's not. Long-term mean doesn't equal normal. I do still believe the VIX will be higher in 2015 than it was in 2014, if we define that by yearly median. That call has the wind at its back, though, seeing as we haven't had one close in 2015 that's below the 2014 median yet.

It's always important to remember, though, that buying a VIX product ahead of an anticipated volatility lift is generally a bad idea. Time is money. If you're early, you'll need an even bigger rally later on just to get back to even, no matter how you play it. And we're likely in a bit of a volatility trough now, so I'd sooner miss the bottom and pay up after it starts moving.

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


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