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VIDEOVIX: Less Volatile Than It Looks
Understanding the Friday-to-Monday pattern.
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Editor's Note: This article is by Don Fishback, of Don Fishback's Market Update.
I wrote an article about what it really means when VIX is at 40. I noted that it was unusual that VIX rose both Friday and Monday, even though the stock market rallied on Friday. That’s because there's a definite tendency for VIX to rise when markets fall.
There’s also another tendency that option veterans are aware of, and that's the tendency for the VIX to fall on Friday and rise on Monday. These graphs pretty much confirm both tendencies.
These are pretty simple graphs. Each graph measures 2 factors going back to 1990. The x-axis represents the percent change in the S&P 500, and the y-axis measures the point change in the VIX. For instance, if you have a data point with an x-axis value of 5% and a y-axis value of -5, it means that the market went up 5% and the VIX fell 5 percentage points. The top graph measures what happens on Fridays, and the bottom graph measures what happens on Mondays.
As you can pretty clearly see, there's a strong inverse correlation between changes in VIX and changes in the S&P 500. Not only can you see that graphically, but you can also see it numerically, via the coefficient in the slope-intercept equation and the R-squared number on each chart.
That equation also confirms what we know anecdotally about the way VIX behaves around weekends. Looking at the intercept part of the equations, we can see that on Fridays, VIX tends to drop about -0.12, even when the market doesn’t move. And on Mondays, VIX tends to rise +0.49, even when the market doesn’t move. The reason is a statistical fluke caused by real-world trader behavior not being fully accounted for in the implied volatility equations.
What all this means is that it truly was uncharacteristic for VIX to rise last Friday, given the fact that we were approaching a weekend and the market was up. But here’s what I think is important: While Friday’s behavior in VIX was unusual, it’s not as if it was wildly out of sorts.
Looking at the 2 charts, the 2 most recent data points are colored in red. Looking at the top chart, the most recent Friday action fits within the orange data points, although it's near the edge of the orange area. In other words, it wasn't exactly what you’d expect, but it wasn’t outside the range of possibilities. And it certainly wasn’t unprecedented. It’s not as if you want to make some sort of prognostication, based on that relatively typical data point.
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