Wednesday, September 24, 2008

Could 30 Be a New VIX Floor?

Yesterday a reader asked, “Have we put in a base for the VIX above 30?”

My response began as follows:

“I count five separate instances (clusters) of the VIX hitting 40 since 1990. In only one of those (1997) did the VIX not hit 40 again shortly thereafter. For the other four, we saw 5, 7, 13, and 21 subsequent days in which the VIX made it into the 40s again. Given the magnitude of the current difficulties, I would be surprised if we do not see at least one more spike into the 40s.

As for a new floor in the VIX, 30 is on the high side, but not unprecedented. We have had several instances in the past where the VIX spent two full months almost exclusively at 30 or above.”

To elaborate a little, starting in August 1998, during the height of the Long-Term Capital Management crisis, the VIX closed over 30 each day for more than two consecutive months. This feat was matched again four years later in August 2002, following the WorldCom bankruptcy and the ultimate bottoming of the dot com crash.

For what it is worth, as of last night the VIX has closed above 30 for seven consecutive days. A two month stretch of 30+ VIX closes would take us out to mid-November.

Finally, to complete my response about the possibility of a new floor of 30 for the VIX, I noted:

“On the other hand, if the country can get behind a bailout plan that shows some creativity and potential, then I would not be surprised to see volatility to slip back to the mid-20s shortly thereafter. least until we dive into the housing, jobs, and consumer spending can of worms.”


Bill Luby said...

After I posted this, I saw that David Gaffen of the WSJ's Marketbeat blog is looking at some of the same issues in his Fear and Loathing

Bill aka NO DooDahs! said...

30 is the new 12.

At least, until 12 becomes the new 30.

It'll happen sooner than most folks think.

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