Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

How the VIX Spike Will Affect 2010

By

Friday's 30% increase bucked a lot of trends.

PrintPRINT
Editor's Note: This article was written by Ryan Renicker of Newedge. Ryan has more than 10 years experience at top-tier brokerage firms generating options and derivative trade ideas for institutional clients. Ryan has been a member of three top-ranked options and equity derivatives strategy teams at three separate firms within the past 10 years.


On Friday, the intraday low-to-high percent move for the S&P 500 CBOE Volatility Index (VIX) was roughly 30%.

The VIX rarely increases this much. In fact, as Figure 1 illustrates, the average weekly percent change for the VIX during the past 12 years is about 7% (the red dotted line in Figure 1).

Figure 1: Percent Change for the VIX: Intraweek Basis, ln (VIX High / VIX Low) -- 1997 to Present

Click to enlarge

Source: Bloomberg

Friday's VIX spike of nearly 30% was the first VIX spike greater than 20% since late October 2008, slightly more than one year ago.

In fact, the intraweek VIX low-to-high percent changes have generally trended lower (lower highs) during the past year.

This lies in stark contrast to the 14 other greater-than-20% VIX spikes observed since mid-1997. In general, VIX spikes of this magnitude or higher tend to occur in clusters. For example, six occurred in 2008; four occurred in 2007; only one occurred in 2006, 2005, 2002, and 2001 (see Figure 2).

In other words, large percent changes in the VIX tend to be followed by additional VIX spikes.

Figure 2: SPX Intraweek Percent Return (Low-to-High) vs. VIX Intraweek Percent Change (VIX Low to VIX High)

Source: Newedge US-Listed Options Sales

Of course, the VIX is merely a statistic that attempts to measure the short-dated implied volatility of the S&P 500 Index and, as such, generally trades in line with SPX short-term realized volatility.

In addition, the dispersion of the VIX during a given time period doesn't necessarily correlate strongly with the dispersion of the underlying S&P 500. This isn't to say that changes in the VIX aren't positively correlated with the high-to-low returns in the S&P 500 Index -- indeed, there's a positive correlation, albeit a weak one, and Figure 3 illustrates this.

Figure 3: Intraweek Low-to-High Percent Change in SPX vs. Intraweek Low-to-High Percent Change in the VIX

Click to enlarge

Source: Newedge US-Listed Options Sales

To sum things up, last Friday's VIX spike -- despite being relatively high -- isn't atypical and I believe such large spikes in the VIX aren't likely to be the norm during the coming year.

As I mentioned in a market letter distributed to clients, I believe the market's volatility in the coming year is more likely going to be analogous to that of 2004 -- a period which followed a "volatility storm" the prior year and continued to trend lower at a declining rate.
No positions in stocks mentioned.

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.

PrintPRINT
 
Featured Videos

WHAT'S POPULAR IN THE VILLE