Thursday, March 14, 2013

VIX - Spot Hits Six Year Lows (2007); What Integer Comes After 2007?... Somethings You May Not Have Realized About the Vol of the Vol.


VIX spot is quoting at trading $11.54, down 2.4% to with IV30™ up 2.3%. The LIVEVOL® Pro Summary is below.



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[VIX] is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking and is calculated from both calls and puts. The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge."
Source: Investopedia

This is a depressed price note, which when referring to the VIX is in fact a depressed vol note. Said simply, the VIX is now at levels it has not seen since February 2007 (according to Yahoo! Finance -- and yes LIVEVOL® has the data, but I was too lazy to go into our tables). By the way, what's the integer that comes after 2007? I always forget...

Let's look to the two-year Charts Tab, below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).



On the price side we can see, well, VIX is at multi-year lows. The largest spikes were in 2008, but we can see it hitting over 45% in just this two-year chart.

On the vol side, I found a very interesting phenomenon. Let's turn to the two-year vol chart of the VIX (the vol of the vol) with just IV30™ and HV180™.



We can see a persistent pattern over the last two years where the short-term implied trades below the long-term historical realized vol. Or said differently, the pink line is usually above the red line. That certainly is the case now. But, let's look back to the original chart, above. Note how much higher the HV20™ is than the IV30™ and HV180™.

IV30™: 79.53%
HV180™: 105.17%
HV20™: 156.45%

So putting these numbers into English: The last month of volatility in the VIX spot is more than double what the options are pricing for the next month. With VIX at six-year lows and the movement in the VIX about double the forward looking vol, that is worth a note.

Am I number hunting for a story? Not really... Here are some more HV levels:

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IV30™: 79.53
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HV30™: 139.35%
HV60™: 127.60%

For completeness, I have included the Options Tab, below



Across the top we can see Apr is priced to 79.53% while Jun is priced to 67.91%. Note that Jun umber is even lower than the IV30™.

The bottom line is, if the VIX continues to move at these HV levels with the spot already at six year lows, we will either see substantially lower VIX than we see now, substantially higher VIX than we see now, or a VIX spot that moves up and down rather abruptly, but stays around this current level. Let's see if someone asks what the next integer after 2013 is in a few years.

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