Monday, November 5, 2012

How High Might the VIX Spike?

Given all the drama in the euro zone, not to mention the fiscal cliff, the various difficulties in China, continued unrest in the Middle East and Northern Africa, etc. it is more than a little surprising that the CBOE Volatility Index (VIX) has failed to trade above 30.00 this year.

In fact, with a maximum VIX of just 27.73 for the year, 2012 could mark the first time in 15 years (if one excludes the great Greenspan liquidity bubble from 2004 – 2006) that the VIX has not made it out of the twenties.

How does 27.73 compare as an annual high in the VIX? Since 1990, the mean high in the VIX has been 37.90 (inflated somewhat by the 2008 high of 89.53), while the median high VIX has still been a reasonably lofty 35.93.

This is not to suggest that the markets have been mispricing SPX options (and therefore the VIX) for most of 2012, only to note that there are certainly quite a few chapters remaining in the European sovereign debt crisis and the fiscal cliff drama, several of which will unfold before the year is over.

This could be one of those years in which the VIX never makes it into the thirties, but if that is to be the case, it will have to buck some fairly high odds in the process.

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[source(s): CBOE, Yahoo]

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