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VIDEOWeekday Seasonality of the VIX
Learning how to make volatility plays.
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Editor's Note: This is a guest post from Trading the Odds.
The VIX is an index that infers 30-day expected (implied) market (S&P 500) volatility from S&P 500 index options (usually in the first and second month, and averaging the weighted prices of puts and calls over a range of strike prices).
For example: The VIX closed at 42.93 on March 24, 2009. This represents an expected annualized (!) volatility of 42.93% over the next 30 days; thus one can infer that market participants expect -- with the assumption of a 68% likelihood (one standard deviation) -- that the magnitude of the S&P 500’s 30-day return will not exceed:
42.93%/ SQRT(12-month) = 12.4% over the next 30 days.
Usually, there's an inverse correlation between the VIX and the S&P 500, due to the fact that market participants expect market volatility to be higher on downward movements in the market. But there are periods when this correlation only applies to a much lesser extent, or none at all.
Such a non-confirmation -- an ‘uncorrelated behavior’ of the VIX versus the S&P 500 -- sometimes gives an early warning that the then-current movement in the S&P 500 may not be sustainable.
But a special kind of such "uncorrelated behavior" of the VIX regularly happens in the Friday-to-Monday (weekend) timeframe, and regularly intraday as well (mean-reversion tendency).
The table below shows the VIX′s historical probabilities and odds for a higher and lower open, a higher high and lower low (than the last session's high/low), and a higher and lower close with respect to the days of the week (since January 2, 1990, the VIX on the dates before September 22, 2003 compiled by the CBOE to the new methodology).
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