More Volatility + Less Fear = Lower VIX?
Structural volatility, systemic risk less of a concern than we realize.
So we have more volatility and less fear - and the VIX falling 10.7% on yesterday's rally.
Of course, the VIX is all about forward-looking volatility and is less concerned with historical volatility, even though there's a high degree of correlation between the two.
In my opinion, the reason why violent upside moves in the SPX tend to result in a lower VIX, even in the face of rising volatility, is due to several factors. As noted above, one of those factors is a smaller fear component of the VIX when markets are rising. Another important factor that depresses the VIX during a large jump in the SPX is the much smaller number of investors who rush to buy put protection without giving much concern to price.
Finally, history demonstrates that, for the most part, markets tend to fall more sharply than they rise, so statistical measures of volatility are likely to show greater volatility when the SPX is making a large move down than when it's moving up sharply.
The chart below shows the changes in the VIX term structure from Monday's close to yesterday's close.
Click to enlarge
As usual, the biggest drop in the VIX is in the front months, with the 2 front months show volatility dropping about 10%. On the other hand, SPX options 15 months out show volatility dropping 6.4% - a relatively high ratio when compared to the front months.
I submit that the distant months are reflecting not just a change in short-term concerns, but a sense that structural volatility and systemic risk are much less of an issue at the present time than had previously been believed.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter