What’s New with the VIX?

by Tyler Craig | April 24, 2012 2:06 pm

Since reaching a new 52-week low just south of 14 last month, the CBOE Volatility Index (VIX[1]) has risen as high as 21 and as of midday Tuesday was sitting around 19. A short-term pop from 14 to 19 would typically be noteworthy and something most option traders would look to fade.

However, it’s been over a month since hammering out the lows at 14 and the VIX has been hanging around 19 for a couple weeks so it’s not as if we’re overextended here.SPX vol chart 300x174 What’s New with the VIX?
Click to Enlarge

It’s also worth noting the rise in the VIX hasn’t occurred in a vacuum. Over the same time frame, the actual movements of the S&P 500 Index (SPX[2]) — as measured by both average true range (ATR) and historical volatility — have lifted a fair amount. The ATR is up from $12 to $16.50 and the 21-day historical volatility (HV) is up from 10% to 14% (see the attached chart).

If we’re assessing the HV/implied volatility (IV) differential, things really haven’t changed much. When 21-day HV was at 10%, the VIX was sitting at a 4-5 point premium at 14-15%. We now have-21 day HV at 14% and yet again the VIX is sitting at a 4-5 point premium at 18-19%.

Keep in mind this is an imperfect comparison as we’re relating what happened in the past (HV) versus expectations for the future (IV). Nonetheless, it provides evidence that the VIX really isn’t that much higher on a relative basis than it was last month.

Though many pundits and volatility addicts like to parse every tick of the VIX, the reality is it doesn’t provide insightful, let alone actionable, information every day. Most of the time it behaves as one would expect, rising as the equities market falls and falling as the market rises.

The times VIX-watchers should really perk up is when it either reaches an extreme high or low, or when it deviates from its normal behavior (such as) moving in the same direction as the market instead of against it.

As of this writing, Tyler Craig does not hold any VIX-related securities.

Endnotes:
  1. VIX: http://studio-5.financialcontent.com/investplace/quote?Symbol=VIX
  2. SPX: http://studio-5.financialcontent.com/investplace/quote?Symbol=SPX

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