How to Prove Your VIX Thesis in One Easy Step

Arbitrary time frames are the key to calling 'trends' in the CBOE Volatility Index (VIX)

by Adam Warner

Published on Mar 30, 2015 at 9:29 AM
Updated on Jun 24, 2020 at 10:16 AM

I know I harp on this a lot, but TV seems dedicated to giving the impression of a volatility surge that just doesn't exist. Here's something I heard Friday: "VIX is up 18% in this really volatile week."

Now, that's factual -- or rather, I presume it was factual when the host said it. Even with Friday's volatility sell-off, the CBOE Volatility Index (VIX) rallied a shade under 15% on the week. But it's a really misleading characterization of the current state of volatility.

Using percentages to contextualize moves when the absolute value of the underlying is low always serves to mislead. If I said, "VIX was up 2 points this week," I would get nothing but yawns. But that's what happened. Conversely, if I said, "VIX rallied 15% this week!!!!", you would take more notice. So, I totally get why TV sticks toward the latter. But it doesn't make it a good way to describe what's going on. As an investor/trader, it's much better to view VIX (or any volatility indicator) in point moves and point premiums (realized vol vs. implied vol) as opposed to percentage moves.

Even if we set that aside and use percentage moves, that statement of "18% VIX POP!" still serves to mislead. It just picks an arbitrary endpoint and uses it as gospel. Remember all the way back two weeks ago? The investing world waited with bated breath as the Fed descended from Mt. Sinai with their "Biggest Statement Ever." On March 17, VIX closed at 15.66. And then, on March 18, it suffered its third worst percentage decline of 2015.

Someone could have come on TV last Friday and said "VIX down 4% in sleepy eight-day trading stretch." In other words, you can prove any volatility thesis quite easily these days. Just pick the right endpoints. I would best describe VIX as "meandering within a modest range." It has closed between 13 and 17 every session since February 11 -- and it's right in the middle of that range now.

Ten-day realized volatility in the S&P 500 Index (SPX) sits in the low 13s now, a bit off the recent highs, but considerably off the lows of early March, near 4. So, it's fair to say actual volatility had an upswing this past month, even if forward-looking implied volatility really didn't do much. But much of that pop is already in the rearview.

I do believe that the basic confusion lies in the frequent definition of market volatility as "stocks not going up." And in that context, yes, the churn of 2015 does equal "volatility." But by the actual definition of volatility, we're neither here nor there right now.

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


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