Monday, December 1, 2008

VIX Drops 30% in Five Days for Eighth Time in 19 Years

A reader asked about the historical significance of the VIX dropping 30.9% in the last five trading sessions. This has only happened six times since the beginning of the VIX data history in 1990. If we lower the bar to a 30% drop in five days, we pick up a total 8 instances; and if we move the threshold down to a 25% drop in five days, the number increases to 32 occasions, including quite a few data points that fall on consecutive days.

If you do this type of analysis often enough, you begin to be able to pick the years that will be most prominent on the screen: 1991, 1994, 1997, 1998, 2002, and 2007. Now 2008 is starting to make its impression in the historical database as well.

The question most people are interest in, however, is not so much the year of the previous instances as the subsequent performance of the stock market in the days and weeks following these 30% drops. The data show almost identical performance patterns for 25% and 30% five day drops in the VIX. Essentially, there is a very strong probability that during the next five days the SPX will be down at least 1% or more. Following the classic mean reversion tendency, in looking out 10 trading days or more, the underperformance gap begins to diminish significantly, so any shorts opened today should have an anticipated lifespan of 10 days or less.


Anonymous said...

Got that 1% drop pretty quickly, and a whole lot more. Bears are still in control of this market.

Angelazzrc said...

Got that 1% drop pretty quickly, and a whole lot more. Bears are still in control of this market.

DISCLAIMER: "VIX®" is a trademark of Chicago Board Options Exchange, Incorporated. Chicago Board Options Exchange, Incorporated is not affiliated with this website or this website's owner's or operators. CBOE assumes no responsibility for the accuracy or completeness or any other aspect of any content posted on this website by its operator or any third party. All content on this site is provided for informational and entertainment purposes only and is not intended as advice to buy or sell any securities. Stocks are difficult to trade; options are even harder. When it comes to VIX derivatives, don't fall into the trap of thinking that just because you can ride a horse, you can ride an alligator. Please do your own homework and accept full responsibility for any investment decisions you make. No content on this site can be used for commercial purposes without the prior written permission of the author. Copyright © 2007-2023 Bill Luby. All rights reserved.
Web Analytics