Monday, October 31, 2011

Shrinking VIX Macro Cycles

Staring at the VIX from the 30,000 foot level, it looks much different than it does from the trenches of daily trading. In the monthly chart below, one can see that from 1990 through 2008, the VIX moved in fairly regular ‘VIX macro cycles’ of 2-4 years in duration, with relatively gentle trends and transition points.

Seen in terms of monthly bars, the financial crisis of 2008 changed the nature of those VIX cycles, with the result that in the last three years the VIX cycles have been short and steep. Unlike the VIX movements through 2008, the more recent VIX movements seem to defy a traditional directional label, so for now at least I have attached a provisional label of “volatility chop” to characterize the VIX movements since the April 2010 low of VIX 15.23. Note that this low coincides with the euro zone approval of $40 billion in bailout funds to Greece. In many respects, the volatility of the last 1 ½ years can be seen as a slow escalation of the European sovereign debt crisis and the evolution of investor opinion regarding the magnitude of the risk and the ability of the euro zone to get ahead of the problem.

Volatility has indeed been qualitatively different since the 2008 financial crisis. You can see the differences on a daily, weekly and monthly basis. Even more interesting for the academician and perhaps problematic for the trader is that distinguishing between volatility regimes is more difficult now that it was for the first decade and a half of the life of the VIX – at least from 30,000 feet.

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Disclosure(s): none


Recent Thoughts on the VIX

The VIX and More blog has been quiet for a while as I enjoyed some vacation time and family time. Of course it always seems that when I take some time off the VIX decides to do something extreme and this time around it was no exception.

While I am about to return to writing regularly in this space going forward, I did want to remind readers that no matter how active the blog is, I am always sharing my thoughts on the VIX and volatility on a weekly basis in the VIX and More subscriber newsletter (which is available with a 14-day free trial) and also in more in-depth feature articles in Expiring Monthly: The Option Traders Journal. Back in July I made some changes to the newsletter to place more emphasis on the VIX exchange-traded products and using the VIX futures term structure to enhance trading strategies.

Expiring Monthly continues to be where I publish my extended thinking on volatility. Last week we published the October edition of the magazine and in it was my latest, Investing Implications of the VIX Term Structure. This article actually built on one of my pieces from the September issue of Expiring Monthly: Trading the Expanding VIX Products Space.

Since I last recapped the Expiring Monthly content in May, I have also authored the following articles for the magazine:

  • VIX Convexity (June)
  • Crises, Event Theta and Risk Assessment (July)
  • Volatility During Crises (cover article for August)
  • A History of VIX Futures Roll Yields (September)

There was a time that I felt that if I did not offer my thoughts on the VIX, the subject would probably be ignored. Now I am delighted to say that there are a number of others who have taken up the cause to provide regular analysis and commentary on the volatility space. Going forward, this gives me more freedom to touch on a wider variety of issues across the investment landscape, but rest assured, the VIX and volatility will always be at the core of my thinking.

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I am one of the founders and owners of Expiring Monthly

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