Friday, June 26, 2009

VIX Convergence Zone in Mid-20s

Since Fridays are days in which recent VIX lows are often tested, I thought this might be a good time to step back from the typical VIX daily chart and look at a weekly chart. In the chart below, I have elected to go back to the beginning of 2006 to capture the details of what was arguably the lowest volatility year on record so it could be compared with the most volatile year we have witnessed, 2008.

While volatility first began to spike in February 2007, it was not until July 2007 that investors began to come to terms with the potential magnitude of the damage should the subprime mortgage crisis morph into a global financial contagion. From July 2007 to September 2008, volatility was elevated, but seemingly contained in the 16-35 range represented by the blue box in the chart. It just so happens that the midpoint of that range roughly coincides with the 2006 VIX high of 23.81 that is represented by the horizontal green line.

To complete the picture, I have added a dotted green trend line that connects the December 2006 low to the May 2008 low. Like the 2006 high and the median for the blue box, it projects to about the 24-25 range.

This is not to say that the VIX cannot go below 24-25, but given the 3.06% drop in the SPX on Monday and the 2.14% gain yesterday, the current 26.65 level in the VIX does seem inconsistent with recent single day volatility.

[source: StockCharts]

Disclosure: Long VIX at time of writing.


nigam arora said...

What are your thoughts for next week, and more importantly based on your analsis how would you profit from it?

Bill Luby said...

Next week we have end of quarter window dressing, the employment report, the ISM survey and a couple of housing data points. Lots of data. Also it is a holiday-shortened week.

I will likely have a bearish position going into the week and see how the data falls out and the market reacts. Even though the holiday tends to compress volatility, I will probably be long volatility too.

(FWIW, I prefer to save the details of my thinking for the subscriber newsletter -- at least for my weekly outlook.)



Unknown said...

bill as a vix futures spread trader; i really enjoy reading a vix blog. thank you
i played vol coming down this week and have a few spreads left going into next week. so we have opposite viewpoints on vol at the moment.

go 25 vix!

Bill Luby said...

Hi Frank,

When I give away my money, I like to know that it's going to a good home!



TripleQ said...

Hi Bill, if you look at realized vols over the past month or so, it looks like both the VIX and VIX futures have overpriced it, so one might argue that the VIX has been inconsistent - but too high.

Bill Luby said...


Indeed the realized volatility data have been very low, largely due to six days early in the month where the SPX was stuck on 940.

An occasional 2% day is warranted, but Monday's 3% day should be a warning of sorts and help to put a floor on the VIX that is, IMHO, fairly close to the current level.

I am also cognizant of the fact that IV is usually substantially higher than realized volatility, so until realized volatility starts to drop below 20...

Bottom line, I think the next two weeks are going to be very interesting -- and set the stage for the last half of the year. Another big bull leg is certainly not out of the question.


Anonymous said...

Bill, have you played VXX at all. I am long that instrument and not doing well the past couple of days.

Just curious as to your thoughts. Thanks

Erik said...

great work Bill....

we are also at upsloping trendline support here on the vix (3 prior touches)

feb07 may08 aug08

admin said...

For those interested, my weekly market analysis:

The VIX, like many charts, seems that it is at an inflection point. Could be off to the races or a breakdown below the existing trading range.

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