Friday, May 8, 2009

How Low Can the VIX Go?

With the bank stress tests results and the April employment report out of the way, volatility is cratering and the VIX is down to 31.45 as I type this.

So how low will the VIX go?

A little more than two weeks ago, in The New VIX Macro Cycle Picture, I suggested that for the current bull leg, 30 was a good guess for a VIX floor. That prediction was part art and part science, to be sure, but there were quite a few technical factors that went into the calculation.

You don’t need a fancy model, however, to make a ballpark prediction for the VIX. I will share a quick and dirty back of the envelope calculation. Since the VIX averages approximately 1.3x the historical volatility of the SPX, one can use the 10, 20 and 100 day historical volatility data to come up with three estimates of the VIX. Generally, I take the lowest one as a floor and average the two readings that are closest together to come up with an expectation of an appropriate current level of the VIX.

With the 10 day historical volatility at 24.10 yesterday, a 1.3x multiplier yields a 31.33 VIX. For the 20 day HV, the numbers are 29.95 and 38.93. The 100 day HV, which includes SPX data going back to December 12th, is 37.52, with a 1.3x multiplier yielding 48.77.

So…the back of the envelope calculations suggest a VIX floor of 31.33 (today’s low is 31.39) and an appropriate current VIX of 35.13.

Remember that these are guidelines at best and assume that the next 30 days will bear a reasonable resemblance to recent history. Still, they support the contention that we are nearing a VIX floor.

For the record, the lowest 10, 20 or 100 day historical volatility level recorded in the past six months was a 10 day HV of 20.38, which translates into a VIX of 26.69. For anyone looking for the lowest possible extreme in the VIX in the near future, 26 would be a good bet. This is also consistent with my earlier prediction that the VIX is not likely to breach a floor of 25-27.


stonebat said...
This comment has been removed by the author.
stonebat said...

only panic buying can make vix around 26. then spx would be around 1k. then big surge in hedging activities. then i will say its ripen to short.

Eric said...

Just saw update on Bloomberg about VIX futures trading higher... Saying expectation of VIX 51 by year-end

Bill Luby said...

Hmmm. VIX futures are down across the board today. Perhaps this was someone's expectations about where VIX futures might be going.

Right now the Nov. futures are in the low 33s. That seems like a good guess to me.

Of course if the DJIA hits 20,000 next month, all bets are off...

Eric said...

if we rip higher on the major indices, i'll be happy, or at least my 401k will be happy. can't figure this out. my company just beat everyone in its sector on earnings growth and somehow it finished today in the red. anyway, as usual i am early/wrong on my entry points. here's hoping i am redeemed next week.

Anonymous said...

Theres no such a thing as a perfect timing.

Some drawdown happens, and traders are used to it.

Im targeting a SP500 below 900 by the end of next week.

We are up 40% from 666 bottom, i belive we are oversensitive to worse than expected news.

Next week retail sales report, PPI and CPI may broke down some expectations of fast recovery and lead us to a new bottom.

lets see.

stonebat said...

vix futures can go up all they want. just like USO case, some people r taking advantage of the spread between near-term vix futures and mid-term vix futures. they contribute to higher spread in a way. they earn money as long as spot vix price stays LOW!!! wtf. the spread could reach to the bubble level at one point. then.. BOOM!!! cant contain a beast in a cage for too long. let vix go down to 25... then please end this bear market rally. its sickening.

Anonymous said...

There were some monster VIX puts sold today at the $27.5 strike for $0.2. Since VIX options expire next Wednesday, I'd say the bottom for VIX is 27.3.

Eric: you aren't the only one who shorted too early. Me too. Since I saw so many SPX puts were bought for June I jumped on the bandwagon and started shorting in mid-April. I failed to realize the extent to which SPX would push higher. This is really unbelievable.

Stonebat: I agree with you this rally is sickening but your (and my) patience will be rewarded because June SPX options still show SPX will drop to the 700s by late June and today some huge July SPX puts were bought so hang in there.

Anonymous said...

The VIX/VXV ratio is saying .98 here:$VIX:$VXV&p=D&b=3&g=0&id=p89090360082

but when I manually calculate it's .89 or so, indicating it's probably time for longs to pack it in. Is this chart stuck or something?

Anonymous said...

VIX is known as a panic index. It is impossible for the market always stays at high fear level. VIX dropping back to the normal level is absolutely inevitable. Usually, spx drops when vix reaches around 23. But we all know the macro has not improved as much as the spx suggested. Therefore, a little higher VIX than normal days like 25-27 is reasonable.

I don't think using the average of the historical values of VIX will give much help as the last few months data should be treated as outliers.


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