When someone follows the VXO more closely than the VIX, it is usually because they have been doing it for a decade or more and found no reason to switch when the CBOE changed how the VIX was calculated back in 2003. For all practical purposes, the differences between the VIX and the VXO are not meaningful enough for most investors to warrant monitoring both volatility indices.
With that preamble out of the way, I am pleased to report on some interesting research on the VXO by Don Fishback, who is indeed an experienced hand when it comes to options and volatility. Looking at instances going back to 1986 in which the OEX (the S&P 100 index, which is the underlying for the VXO) declined 10% and the VXO remained under 30, Fishback concludes:
“Bottom line is that when the market falls 10% off of a recent high, and VXO stays below 30%, what was bad gets worse. In every prior instance where VXO failed to climb to above 30%, the market continued lower. The MINIMUM additional downside is another 10%.”
Granted, these conclusions cover only six data points that fit the statistical profile noted above, but the correlation between the level of the VXO when the 10% OEX decline is met and the extent of the subsequent decline over all 14 data points in the study is also worth pondering. Read the full article at 10% Declines and VXO Less than 30% and consider checking out another take on Don’s work by my blogging alter ego at Daily Options Report.
When it comes to VIX spikes a signs of a market bottom, my thinking is remains that while we don’t need a Brunhilde Day to signal capitulation, the higher the VIX spike, the higher the odds that a bottom will hold. See January’s Can the Markets Bottom Without a VIX Spike? for a more detailed discussion of VIX spikes and market bottoms.