Sunday, November 20, 2016

Post-Election Risk Trending Up in Treasuries and the Euro, Down in U.S. Stocks

You can always tell when the crowd gets long the VIX and ends up on the wrong side of the trade.  “The VIX is broken!” becomes an oft-repeated refrain, as does “The markets are rigged!” and the usual list of exhortations from those who are in denial.  The current line of thinking is that the world must be much more dangerous, risky and uncertain as a result of a Trump victory, yet the VIX is actually down 31.4% since the election – ipso facto the VIX is broken.

While I have more than a small soft spot in my heart for the VIX, I will be the first to point that taking an Americentric, equity-centric view of the investment landscape is dangerous and naïve.  More often than not, the issues that end up having a strong influence on the VIX are born on foreign soil and/or in other asset classes.  Just look at the recent history in China, Greece, Italy, currencies and commodities to name a few.

When it comes to looking at implied volatility indices as a risk proxy, I prefer to survey the landscape across asset classes, geographies and sectors, which is why I have developed tools such as a proprietary Macro Risk Index (more on this shortly) that look at risk across asset classes, geographies and sectors.

In the graphic below, I have isolated a handful of volatility indices that cut across asset classes and geographies to show how these have moved in the eight days following the election.  Note that Treasuries (TYVIX) and the euro (EVZ) have been trending steadily higher since the election as uncertainty related to the future of inflation and interest rates in the U.S. has risen, while the relationship that the Trump Administration will have with our NATO allies and the European Union is also somewhat murkier. 

Gold implied volatility (GVZ) initially moved sharply higher following the election, but has since receded, as gold prices fell swiftly after the election, but have since stabilized.  Meanwhile, emerging markets saw dramatic selling immediately following the election, but have bounced during the course of the past week as fears and implied volatility (VXEEM) have subsided.  Last but not least, the moves in crude oil and crude oil implied volatility (OVX) have been the least remarkable of the group

[source(s):  CBOE, VIX and More]

In aggregate, the picture is a mixed one in terms of implied volatility, risk and uncertainty.  As is often the case, risk has become elevated in certain asset classes, such as Treasuries and the euro.  In other areas, such as U.S. equities – and their VIXian barometer – there are winners and losers, with the result that a net bullish outlook has moved equity implied volatility lower.  This is not to say that a Trump Administration – whose cabinet members and policy priorities are largely unknown at this juncture – will not increase risk in some areas.  More risk is certainly on the horizon and if history is any guide, an Americentric, equity-centric view of the investment world is likely to be slow in identifying those risks.

Related posts:

For those who may be interested, you can always follow me on Twitter at @VIXandMore

Disclosure(s): the CBOE is an advertiser on VIX and More

Tuesday, November 8, 2016

Top VIX Crushes in History

Yesterday’s sharp downward move in the VIX gave me a reason to tweet that the volatility crush as seen in the SPX and VIX was among the top 25 in history.  Upward pressure on the VIX toward the end of the session dropped the VIX down to the 30th largest VIX decline in history, but along the way the Twitterati raised a number of questions about volatility crushes and the VIX as a measurement tool of broad market volatility crushes.

Since I have never seen any data related to the VIX and volatility crushes before, I thought this might be an opportunity to present some of my data and talk about the findings.  In the chart below, I have captured the 25 largest one-day declines in the VIX since 1990 and have presented data showing the forward performance of the SPX in periods from one to 100 days and I have also added some brief commentary regarding the causes.  In some cases I link the volatility crush to a previous VIX spike and use some explanatory shorthand in the process.  For instance, the top crush day, May 10, 2010, followed 2 days after the 21st largest VIX spike (“2d+ #21”).

[source(s):  CBOE, VIX and More]

Of course, most of these volatility crush days coincided with huge jumps in the SPX, but there are some interesting exceptions, not the least of which was the 0.04% decline in the SPX back on April 11, 1990.  That just happens to be the only day for which I cannot find any obvious explanatory catalyst – to the extent that a 0.04% in stocks can actually have a catalyst – but given the proximity to the upcoming Gulf War, my guess is that some sort of news related to Iraq played into this event.

Note also how many of these volatility crush instances follow other important market-moving high fear events one or two days later, in true mean reversion fashion.  Examples on this list range from the flash crash, Greece, Lehman Brothers and Bear Stearns to several VIX all-time highs, Russian political and economic crises, the Boston marathon bombing, etc.

Things get even more interesting if you compare the top 25 VIX crushes to the top 25 VIX spikes in history (for an identical table recapping the top 25 spikes refer to Last Two Days Are #5 and #6 One-Day VIX Spikes in History.)  For starters, the top 25 VIX spikes all move up at least 31%, while none of the top 25 VIX crushes managed to eclipse the 30% decline level.  Also note the differences in the mean reversion predictive value of spikes versus crushes.  In general, the performance of the SPX following VIX crushes is modestly lower than that of the SPX in general.  On the other hand, the performance of the SPX following VIX spikes is generally better than the SPX in general – much more so if the September 29, 2008 outlier is dropped from the data set.

Another point that I think is worth making speaks to the overall changes in the volatility space.  The critical data point is that 11/25 of the top 25 VIX crushes happened since the beginning 2010, while 14/25 of the top 25 VIX spikes have occurred during the same period.  This means that we have had as much in the way of big volatility moves in the list seven years as in the previous twenty years of VIX data.  In other words, the volatility landscape is changing and the rise of VIX futures and VIX ETPs are no doubt an important part of that change.

For those who may be interested, you can always follow me on Twitter at @VIXandMore

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Disclosure(s): the CBOE is an advertiser on VIX and More

Sunday, November 6, 2016

VIX Sets New Record with Nine Up Days in a Row

Over the course of the past few days I have been tracking the slow grind upward in the VIX on Twitter, noting that it had been up seven, eight and eventually nine (as of Friday) days in a row.  As the VIX is a mean reverting animal, I find it interesting that until Friday, the VIX had never risen for nine consecutive days in 27 years of VIX data.  Perhaps even more interesting, during the same period, the VIX had fallen nine days in a row on nine separate instances and even managed to fall ten days in a row on three occasions.  For those who may be wondering, this is yet another data point supporting the idea that VIX mean reversion is more robust following a sharp VIX spike than a sharp VIX decline.

Whenever the VIX makes an unusual move, I am bombarded by variations along the lines of, “That’s nice, but what does it mean for the markets?"  As much as the doomsayers hate to hear this, fear is almost always a great fade, particularly when you have a little patience.  Rather than talking about the matter in theoretical terms, however, I thought I would let some numbers do the talking.  In the table below, I have assembled the fifteen instances in which the VIX has been up at least seven days in a row and have calculated the mean and median performance in the VIX for seven different intervals ranging from one day to 100 days.

[source(s):  CBOE, VIX and More]

Not surprisingly, the mean and median performance of the VIX following these 15 streaks and 1-100 days is uniformly negative.  The data set includes data from Thursday and Friday, which show increases in the VIX and render the one-day performance relatively weak when compared to the rest of the measurement periods.  That being said, mean reversion is evident from the first day all the way through the five-month period that forms the most distant measurement date in this table.

Once again, these findings are consistent with dozens of similar tables presented in these pages over the years that show fading a VIX spike is, on average, an excellent trade opportunity, assuming elevated levels of volatility will persist.

Returning to theoretical territory, if you think about it, what is the type of environment that is likely to cause the VIX to move higher every day for a week and a half or so?  Typically it is event risk in the form of a known event on the calendar that investors obsess about and become increasingly anxious about as it draws ever nearer.  Think of Fed meetings (The VIX and the Pre-FOMC + Post-FOMC Trades), Greece’s elections or key Parliament votes, Congressional votes related to the fiscal cliff, etc.  [See A Conceptual Framework for Volatility Events for more background and context.]

Contrast fretting about the scheduled event risk with something that comes out of nowhere, like the yuan devaluation, Ebola virus, Fukushima, various terrorist incidents and even the Arab Spring.  These dark gray swans blindsided investors and caused a sudden sharp VIX spike – the kind whose steepness cannot be sustained over the course of 1 ½ weeks.

A Twitter reader asked about volatility crushes and their timing.  In a nutshell, a volatility crush is the opposite of a volatility spike and generally happens after a scheduled event is over.  In addition to the macro events listed above, one often sees a volatility crush following an earnings report.  For reasons discussed in A Conceptual Framework for Volatility Events, a volatility crush is much less likely to occur in the context of an unscheduled event with no notice and an uncertain duration.

Today we saw an excellent example of a volatility crush following the announcement by James Comey that the recently discovered batch of emails contained no new evidence in the Hillary Clinton private email server case, reaffirming that there would be no criminal charges against Clinton.  Front month (November) VIX futures are down 12% on this news.

For those who may be interested, you can always follow me on Twitter at @VIXandMore

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Disclosure(s): the CBOE is an advertiser on VIX and More

How to Play a Volatility Spike (Guest Columnist at Barron’s)

Yesterday, I was pleased to once again have an opportunity to pen a guest column for Barron’s, pinch hitting for Steve Sears in his The Striking Price column with How to Play a Volatility Spike.  If my math is correct, this is the nineteenth time I have been a guest columnist in this fashion.  I always try to keep my subject matter linked to current events, but the irony is that when the signal comes to grab my bat and make my way to the on-deck circle, invariably the markets are hit with a bout of volatility.  The result is that as a “volatility guy” I often end up talking about what to do in an environment of elevated volatility, as was the case in Seizing Opportunity from Stock Market Volatility, Be Greedy While Others Are Fearful, Calm Down and Exploit Others’ Anxieties and There’s Opportunity in Uncertainty.

My thesis in the Barron’s article is fairly simple and should not come as a surprise to those who have been paying attention to what I have been saying in this space over the course of the past decade:  VIX spikes are typically a gift from the mean reversion gods.  The trick, of course, is in the timing of the mean reversion – and perhaps whether to bother to make the distinction between mean reversion and median reversion.

In the chart below, one can see VIX data going back to 1990, with the mean of 19.71 added as a dotted red line.  Even a quick glimpse at the graphic reveals just how difficult it is for an elevated VIX to stay elevated, regardless of the cause.

 [source(s):, VIX and More]

The Barron’s article talks about some trading opportunities that arise from VIX spikes and includes a bull put spread trade idea involving QQQ

I have remarked on a number of occasions in the past that whenever Steve Sears reaches out to me to pen a guest column, inevitably some invisible market force snaps to attention and arranges for a volatility spike.  Either Steve has some amazing insight into the future of volatility (not unthinkable for a guy who was a driving force behind the creation of the ISEE Index) or some other unseen forces are toying with me.  If this happens one more time I am going to start to wonder if I have an obligation to publicly disclose future column requests…

In the meantime, tune out as much of the election hysteria as you can and consider all the gifts from the mean reversion gods that looked too risky to accept at the time.

Related posts: 

A full list of my (19) Barron’s contributions:

Disclosure(s): the CBOE is an advertiser on VIX and More

Wednesday, November 2, 2016

VIX Median Reversion and Five-Year Moving Averages

When people talk about the VIX you often hear them refer to mean reversion, which refers to the tendency of the VIX to be pulled inexorably in the direction of its long-term mean.  With 27 years of data from the CBOE (including some historically reconstructed data), it is possible to calculate the lifetime VIX mean, which happens to be 19.71 at the present.

As an options trader, however, I am wary of giving too much weight to outliers when it comes to predicting the most likely outcome in another options expiration cycle or two.  For this reason, I am more interested in knowing the lifetime VIX median, which is only 17.84.  The median is the 50th percentile while the mean just happens to be in the 60th percentile.  The discrepancy is due to the fact that VIX values are not normally distributed.  Instead, VIX values exhibit a positive skew (a topic for a future post), due to the fact that there are a handful of VIX historical extremes in the 50s, 60s, 70s and 80s.  Meanwhile, the middle 50% of VIX values (the 25th to 75th percentiles) range from 14.04 to 23.98.

So…if the VIX median is so important, why is it that we never hear about it or about median reversion?  Good question.  I touched on that subject on “Drilling Down on VIX Mean Reversion” in the January 2013 issue of Expiring Monthly:  The Option Traders Journal.  As I see it, anyone who is focusing on means in a skewed distribution is necessarily assuming a normal distribution and statistics related to normal distributions when no such distribution or relevant statistical analysis exists.

I mention all of this because yesterday was one of those periodic bursts of activity for me on Twitter.  In some Twitter conversations, we discussed the median VIX vs. the mean VIX and there was a request for a chart of a five-year moving average of the median VIX.  Since I have never seen such a chart – or any VIX median chart for that matter – I present below a chart of the five-year moving average of the median VIX, using data going back to 1990. 

 [source(s):  VIX and More, CBOE]

Note that the current five-year median VIX is 15.07, while the five-year mean VIX is 16.63.  For the full history of the VIX, going back to 1990, the lifetime median VIX is 17.84, 9.5% below the lifetime mean VIX of 19.71.  What does all this mean?  Mostly that one should be careful using statistics that are associated with a normal distribution when analyzing the VIX.  Perhaps more importantly, VIX traders should also think at least as much about median reversion as mean reversion.

As an aside, while I have not been active on the VIX and More blog as of late (this is about to change soon, starting today), I have been active in various other media incarnations.  Last Friday, for instance, I was a guest on the Volatility Views weekly podcast hosted by Mark Longo of The Options Insider.  Tomorrow at 2:00 ET, I will be a speaker on a webinar, Trading VIX to Hedge Market Risks: What You Need to Know, with Tom Lydon of ETF Trends, Greg King of REX Shares and Vinit Srivastava of S&P Dow Jones Indices.  On the print side, this Saturday I will also be a guest columnist at Barron’s, pinch hitting for Steve Sears.  Last but not least, if you wish to follow me on Twitter, where I have been active for ten (!) years, you can find me at @VIXandMore.

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Disclosure(s): the CBOE is an advertiser on VIX and More

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