I usually speak of mean reversion in terms of the distance the VIX is away from its 10 or 20 day simple moving average. These are high percentage plays with a good bit of statistical data to support a mean reversion trade.
With all the volatility of the past three weeks or so, the SMA that is getting my attention right now is the 100 day SMA, where the VIX sat 85.2% above the 100 day SMA of 15.28 as of Friday’s close.
This is not quite unprecedented, but since 1990 there have been only 13 trading days – several of which have been clustered together – in which the VIX has closed 80% or more above its 100 day SMA. Without an exception, these have all been excellent times to predict a VIX reversal, as the minimum VIX contraction 50 trading days later has been 18%. Specifically, the mean VIX contraction is 16% in 3 days, 20-21% in the 5/10/20 day period, and a whopping 33% some 50 trading days out.
Given that VIX options still have 8 trading days left for the current cycle, I suspect that the August 25 puts would be a good play, thought the 22.50s probably deserve some attention as well.
Can this gravity defying dance really continue for another week and a half? I’m betting against it.