You will often hear us making reference to the VIX, the CBOE’s Volatility Index. The VIX tracks the 30-day expected moves in SPX, and is calculated from options prices on the index. This makes it a good measure of Implied Volatility (IV) in the market and at tastylive we love sell option premium in high IV environments. This past Monday, June 13, 2016, the VIX saw it’s largest trading day since January 06, 2016, a time of extreme market volatility. The VIX is now relatively high as it crossed above its long-term average of 19.5 on Monday. The SKEW Index, which measures how much more puts are trading for than calls also traded near its highs and is at 140.91 as traders and investors are paying up for downside protection. It’s unusual to see volatility move from low to high so quickly but what’s really unusual is that this move occurred in a time of relative market quiet. Is there anything we can learn from such moves? Do these moves predict future trading in SPX?
Our study was conducted in the SPX and the VIX. The time period covered was from 1990 to the present. We tracked single day VIX moves of up 4 Points and when the VIX goes from below long-term averages to above long-term averages, an occurrence that happened this week (30% up). We then tracked the SPX performance over the days and weeks after the VIX spike. These moves are rare and have only happened 18 times in 25 years.
A table showed the change in the VIX and SPX plus 1 day and 5 days after the initial spike in the VIX of 4 points. The table showed that the VIX traded in the same range and clustered at high volatility, but drifted slightly lower. The SPX saw most of its move in the same period of the VIX spike. We have already seen in this week the move the SPX typically makes after these types of VIX rallies. Do the high SKEW values mean this time is different? Tom said, “When the VIX spikes, the perception is you have to be the first one in to buy the bottoms. When you get VIX spikes like this the only play is to sell volatility [while staying Delta Neutral].”
For more information on the SPX, VIX & Big Moves see:
Market Measures from January 8, 2016: “To Be Expected | Context Around Big Moves”
Options Jive from January 15, 2016: “What’s the Deal with the Skew Index?”
Market Measures from March 22, 2016: “Relationship Between SPX and the VIX”
Options Jive from April 26, 2016: “Volatility Environment: Market Moves”
Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the important takeaways and the results of our study on whether large spikes in the VIX predict future moves in the SPX.
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