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VIX Moves, Just When You Think It Won’t

Fear Gauge surprises on quiet weeks


A funny thing happened to the CBOE Volatility Index (CBOE: VIX) yesterday. In the midst of what looked like typical pre-holiday blahs, VIX pulled off a pretty considerable rally. So much so that it went from nearly 10% its 10-day Simple Moving Average and borderline oversold on Friday, to 10% above the SMA and overbought. All in a couple hours of trading.

But alas cooler heads … or at least more complacent ones … prevailed, and VIX closed at 16.96, still up nicely from Friday’s close of 15.32, but way off the days highs of over 19.

The S&P downgrade of U.S. debt of course catalyzed all the action. And with VIX more or less at its yearly lows, it had plenty of room to run.

It does highlight an important point. I frequently note all sorts of seasonal quirks in VIX, like tendencies to drift on Fridays and around holidays and rally on Monday’s e.g. But that stuff all takes place on the margins. We’re talking maybe a point or two of understatement in VIX on a holiday week, really just noise. It’s real, but it gets easily trumped by actual news.

Look at it this way. All things being equal, you don’t want to own options on a week where you anticipate little action. Options decay in value as expiration approaches, so time is really money. But if news hits, especially something pretty much out of the blue like the S&P downgrade, you no longer worry so much about those extra few days of decay. A sleepy week has suddenly turned volatile. Traders literally turn the machines back on.

Oh, and one oddity. CBOE breaks VIX out into two cycles now. You can see the near month cycle under symbol CBOE: VIN, and the second month out under symbol CBOE: VIF. VIF rose about 5% yesterday, VIN about 6%, yet VIX rose over 8%. It strikes me akin to saying Derek Jeter bats .250 in day games, .270 in night games, yet .290 overall … which obviously makes no sense. So perhaps the breakdown into VIN and VIF doesn’t tell us much.

Follow Adam Warner on Twitter @agwarner.

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