On March 5, 2009, as we neared the end of a simply awful stretch of market action, the CBOE Volatility Index (VIX) hit a low of 46.98 and a high of 51.95, before closing at 50.17.
Staring at a VIX of around 17 on the screen now, it may be hard to remember this, but 50 in the VIX was actually well off the highs. The VIX hit 80 in October 2008, and then again in November 2008.
That’s not to say you ever had the chance to “sell” the VIX at those levels. As we note periodically, VIX futures merely represent the market opinion of where the VIX will settle at the specific expiration. And, at the time the VIX soared into the stratosphere, VIX futures traded at serious discounts to “cash,” as much as 20 to 30 points below in fact.
What you could have done was sell S&P 500 (SPX) or SPDR S&P 500 ETF (SPY) options with near-80 volatility. I say “near” because that number overstates where at-the-money options actually traded. They peaked at about a 70 volatility. The reason the VIX peaked higher was because it incorporates a varying (but large) number of out-of-the-money put strikes in the calculation. And if you wanted to sell cheap dollar puts at the time, you could have named your price.
But selling puts at record-high volatility did not actually work as well as you would think in the general sense. For one thing, realized volatility in the SPX and SPY was even higher, with 10-day historical volatility peaking at about 110.
For another thing, the market hadn’t actually bottomed. The SPY hit 81 in the October 2008 VIX explosion, and then 71 in the November panic, before ultimately bottoming at 67 in March 2009.
What does stand out, though, is that from October-November 2008 to March 2009, the market went a bit lower while the VIX went a lot lower.
The behavior since March 2009 is more “normal” in that the SPY is getting close to doubling off the lows, while the VIX has lost two-thirds of its value.
So where does that leave us now?
The VIX at 17 or so sure looks cheap after what we’ve seen, but the VIX prices off expectations. It’s a proxy for the expected volatility of SPX for the next 30 calendar days. And in the absence of expected news events, the market prices that volatility of the much more recent past. And that recent past is a time of very strong market action and very weak volatility.
The VIX is low at 17 compared with the action of a year ago; it’s not low compared with the action of a week or a month ago. And with no grand uncertainty on the horizon, it’s at least comprehensible why options trade here. Ten-day realized volatility in SPY and SPX is now about a 10. One year ago, 10-day realized volatility was about 40 on its way up to 50, before dropping for good.
What a difference a year makes.
Related Articles:
- Forget Stocks … the VIX Heads to Gold and Oil
- Predicting Volatility With the VIX
- Can the VIX Tell You When to Get Long or Short?
- Why It’s Vital You Understand the VIX
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