There are really only a handful of important things to remember about the VIX. I can summarize the most important ones as follows:
- The VIX is generally negatively correlated with the SPX
- The VIX is a mean-reverting animal
- VIX options prices are calculated off of VIX futures
Now raise your hand if you follow the futures market. I thought so. Well, neither do I for the most part, but I’m quickly coming around to futures as a useful tool for getting a better handle on how investors are thinking about and betting on the future.
Rather than try to sound like some sort of evangelist, however, let me just offer one chart, which comes courtesy of the CFE. I will skip the commentary, other than to translate the obvious into some numbers: when the VIX jumped 64% from February 26th to February 27th, the nearest futures, the March ’07 VIX, moved less than half as much in percentage terms. Looking further out, the August ’07 VIX futures moved about one tenth of the VIX index, while the November ’07 VIX futures moved about one thirtieth as much as the VIX did.