I am frequently asked to provide more commentary on VIX futures and the extent to which expectations for future volatility as indicated by VIX futures contrasts sharply with the cash or spot VIX. While I think this is a worthwhile exercise, I am not a big fan of the various charts that I can easily put my hands on, including this one from FutureSource.com (which can be easily edited) that compares the August 2008 VIX futures with the cash VIX. The FutureSouce.com chart in the link above, for instance, uses different Y-axis values for the futures and the cash market, making comparisons a little too murky for my taste.
It is for these reasons that I was so excited when the CBOE announced the VXV, which is analogous to the VIX except that it uses a 93 day time horizon in lieu of the 30 day time frame of the VIX. Better yet, the VXV is supported by my favorite chart service, StockCharts.com, which makes it easy to provide a wide range of customizable comparisons of the VIX and the VXV.
Launched three months ago, the VXV chart finally has a critical mass of data that makes it easier to identify trends. My interest, however, is not so much the VXV in a vacuum as it is compared to the VIX. Hence the VIX:VXV ratio, which is what the chart below captures. While it is still relatively early to have high confidence trading rules for this ratio, my working hypothesis continues to be that this ratio will be mean reverting around 1.00, with the best long entries (for the SPX or other long instruments) when the ratio drops below 0.90 and the best short entries when the ratio rises above 1.10.
In addition to the extreme values that the VIX:VXV ratio generates as trading signals, some of the middling values may also have interpretive value. As I type this, for instance, the ratio sits at 0.997, suggesting that there is no discernable difference between volatility expectations over the next 30 days and over a 93 day period. Said another way, today’s rally does not seem to have put the VIX in an ‘oversold’ mode, at least relative to future volatility expectations.