Friday, August 22, 2008

VIX Slips Below 19

One of the interesting side benefits of having a blog is that you can get a sense of what some investors are thinking just by looking at the Google searches that result in people clicking through to the blog. Today, for instance, I note some have found their way to VIX and More with the following Google searches:

  • “VIX oversold”
  • “VIX call options”
  • “trade using the VIX”
  • “bull call spread VIX”
  • “calendar spread VIX”
  • “predict VIX settlement value”
  • “September VIX futures”

It certainly appears as if quite a few investors are looking at a VIX that is below 19 and trying to understand that number in the context of headlines filled with gloom and doom. One possible conclusion, which I’m sure accounts for a fair number of the Google searches above, is that it is just a matter of time before the VIX spikes to a level consistent with the fear and anxiety which dominates much of the media coverage of the markets at the moment.

While a VIX of 18.92 (as I type this) sounds low, it is only 7.3% below the 10 day simple moving average and 11.8% below the 100 day SMA. Further, because today is a Friday and we have some low volume days approaching in advance of the Labor Day holiday, there are some calendar reversion effects at work, as Adam at Daily Options Report has detailed nicely in VIX Bicentennial Parade and several previous posts.

A look at VIX futures (see futures quotes from optionsXpress below) shows that futures expectations for the VIX for October to May are generally in the range of 22.50 – 23.20. Anyone considering a VIX options trade needs to get a better sense of how VIX options are priced off of and generally move with VIX futures, not the cash or spot VIX index that is four points lower.


That being said, there is also the case to be made that the VIX is not that low at the moment. Looking at a weekly chart, for instance, the VIX is toward the middle of the typical Bollinger band settings. This is the essence of VIX options: when they look like sitting ducks, it is usually an optical illusion.

Still, with a relatively low VIX and relatively low VIX implied volatility (58.2%), VIX options may be inexpensive portfolio insurance and/or a good leveraged bet against further turmoil in the markets. The key concept to remember is that a 3-4 point move in the cash/spot VIX will have little impact on the VIX futures prices on which the VIX options are based.

5 comments:

Alex Marion said...

Great post. What are your thoughts on the current VIX:VXV ratio? It's approaching levels associated with signifigant market tops.

Bill Luby said...

Hi Alex,

Thanks for the kudos.

The VIX:VXV ratio is really just a variant on the VIX futures spread issue. It too is bearish at 0.88, but there should be a little discounting of that number due to the 'calendar spread' issues noted above.

That being said, most of my indicators are in the neutral to slightly bearish range right now.

Cheers,

-Bill

Jeff Pietsch CFA, Esq said...

Excellent.

Eric J. Fox said...

Bill...could you post an updated table of futures prices like you did in this post. Do you think its time to bet that the VIX has topped out here at 41.36?

Bill Luby said...

Hi Eric,

The futures are probably moving a lot less than you might expect.

To see the current VIX futures quotes, go to the "VIX and Sentiment Links" section in the upper right hand corner of the blog and click on "Volatility Futures Quotes"

Cheers,

-Bill

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