Monday, February 27, 2017

Ten Years Since the Biggest VIX Spike Ever

Ten years ago today, we witnessed that largest one-day VIX spike in the nearly three decade history of the VIX.  On that day, the VIX rallied from a prior close of 11.15 to 18.31 – a 64.2% gain.  The move came in conjunction with a 3.5% decline in the SPX (large, but nothing like what would follow during the next two years) and followed overnight concerns related to the Chinese government raising interest rates to discourage speculation.  The fears in China were largely responsible for a 8.8% loss in the Shanghai Composite Index and a 9.9% loss in the FTSE/Xinhua China 25 index that is the basis for the popular Chinese ETF, FXI.

In retrospect, the biggest VIX spike of all was a short-lived phenomenon whose fundamental and technical underpinnings turned out to pose no lasting threats.  As is often the case, traders who faded this move (and keep in mind there were no VIX ETPs available at that time) and bet on mean reversion cleaned up on that trade.

So, did this move in 2007 provide a hint as to what would follow in 2008?  As I see it, the timing was merely a coincidence.

It may not be a coincidence, however, that the biggest VIX spike in history helped to usher in the golden era of VIX spikes, with 15 of the top 22 one-day VIX spikes of all time having occurred during the past decade, as is reflected in the graphic below.  Of course, most of the spike in VIX spike activity was the result of the Great Recession and some of the “disaster imprinting” that followed such a severe shock to many investor psyches.

[source(s): VIX and More]

Some may look around at a VIX that is not too much different now than it was a decade ago and wonder what it might take to trigger another 64% jump in the VIX.  Certainly there is a huge policy uncertainty overhang at the moment, lots of political (and related economic) uncertainty in Europe and there are always some black swans lurking just out of our sightlines.

For now, however, will just have to live with that eerie, unsettling feeling that often accompanies low volatility and wait for another bump in the night before we reassess the volatility landscape.

Further Reading:


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


Disclosure(s): none
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Sunday, February 26, 2017

The VIX Summit: CBOE RMC (March 8-10 in Dana Point, CA)

I often get asked about where to go to learn more about the VIX and volatility.  Well, if there is one event each year that falls in the absolutely-do-not-miss category, it is the CBOE’s annual Risk Management Conference, which is back in Dana Point, California this year from March 8-10.  It should be noted that while this is the 33rd annual incarnation of this event in the U.S., in the past few years, RMC-Europe (September 11-13, 2017 in Hertfordshire, U.K.) and RMC-Asia (December 5-6, 2017 in Hong Kong) now give VIX aficionados three different opportunities to gather around the globe and immerse themselves in all things volatility.

This year, Ed Thorp is the keynote speaker and as I have yet to hear him speak in person, I am very much looking forward to his talk on “Position Sizing and Relation to Risk Management.”  Another featured speaker is Benjamin Bowler, Global Head of Equity Derivatives Research, Bank of America Merrill Lynch, whose talk is titled, “Post-Central Bank Volatility: More Risk But More Alpha.”  Two of my favorite perennial speakers are back again this year:  Maneesh Deshpande, Managing Director and Global Head of Equity Derivatives Strategy, Barclays is a panelist for “Impact of Flows on Cash and Derivatives Markets: Myths and Realities,” while Rocky Fishman, Equity Derivatives Strategy, Deutsche Bank Securities Inc., is a panelist for “Options Out of This Country.”

Also, Ed Provost, President & Chief Operating Officer, CBOE Holdings, Inc. will be there to kick off the proceedings and if history is any guide, this is when we are most likely to get some insight into any upcoming or recently launched CBOE products.

For more information, check out the full agenda or register here.

While the RMC content is guaranteed to be world class, this is also the greatest gathering of volatility practitioners, academics and other manner of VIXophiles that I am aware of.  In short, if you speak VIX and are looking to find your lost tribe, here they are.  This is why I like to informally refer to the RMC as The VIX Summit.

While the CBOE has provided excellent coverage of this event on Twitter and on the CBOE blog, I will do what I can to pass along real-time and near real-time commentary as well.

I must admit that one of the most interesting conversations I have ever  had on the VIX was at with the creator of the product, Robert Whaley, who regaled me with some interesting stories related to the origin of the VIX at the 2015 CBOE RMC.  I trust this year will deliver some equally compelling memories.

Last but not least, if you see me this year, please stop and say hello.

Further Reading:

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
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Clustering of Volatility Spikes

Last week, my Putting Low Stock Volatility to Good Use (Guest Columnist at Barron’s) triggered a bunch of emails related to the clustering of low volatility.  Most readers expressed an interest in the phenomenon of volatility clusters occurring in both high and low volatility environments and were curious about the differences between high and low volatility clusters.

When it comes to measuring volatility clusters I am of the opinion that realized or historical volatility is a more important measurement than implied volatility measurements, such as is provided by the VIX.  When I think in terms of VIX spikes, I generally focus on two single-day realized volatility thresholds:  a 2% decline in the S&P 500 Index and a 4% decline.

The graphic below is in many respects the inverse of the graphic in Putting Low Stock Volatility to Good Use (Guest Columnist at Barron’s) – and this should come as no surprise.  Simply stated:  while both high volatility and low volatility cluster in the short-term, volatility regimes tend to persist for several years, so it is very rare to see a clustering of high and low volatility in the same years.  This is exactly the principle I laid out more than ten years ago regarding echo volatility in What My Dog Can Tell Us About Volatility.

[source(s):  CBOE, Yahoo, VIX and More]

Note also that in spite of all the talk in the past few years of the potential implosion of the euro zone, a hard landing in China, central banks across the globe creating the seeds of our destruction, increasingly bipartisan politics creating deep divides across the nation, etc., etc. – volatility has been relatively mild during the past 5-6 years.

The interesting thing about volatility regimes is that they eventually transition from low volatility environments to high volatility environments and vice versa and create what I call VIX macro cycles in the process.  The volatility transition phases are some of the most interesting times in the market and can certainly be some of the most profitable.  These inflection points are sure to be a target of some of my future writing on volatility.

So, as VIX and More sails off into its second decade of publication, I vow to flesh out some of my evolving thinking on subjects I have touched upon above (some of which have lain dormant in this space for several years) at the same time I charge off into new areas.  While I will continue to have a laser focus on volatility (particularly its global, multi-asset class aspects), it is time to pay more attention to the “and More” portion of this title of this blog and make a push into new frontiers.  Said another way:  my thinking likes to cluster, but it likes to spike as well.

Finally, most posts tend to touch on one or two key ideas, so I typically put a half dozen or so links below that I refer to as “Related posts.”  Today, it seems as if I have touched briefly on so many subjects that more links (I’m sure today’s is a new record) seem appropriate and instead of referring to these as related posts, they are now officially Further Reading going forward.  Enjoy!

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

 Disclosure(s): none

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Monday, February 20, 2017

SPX 1, 2 and 3-Year Returns Following Top and Bottom Five (and Ten) VIX Average Annual Readings

On Saturday, I posted Putting Low Stock Volatility to Good Use (Guest Columnist at Barron’s) and used that opportunity to expand upon some of the points I raised in my February 18th column for Barron’s.  Specifically, I addressed the issue of the clustering of low volatility and used a graphic to show that when the VIX closes below 12, it tends to persist in these low readings, clustering for several years, before remaining above 12 for even longer periods during high volatility regimes.  

Another claim I made in the Barron’s article (Putting Low Stock Volatility to Good Use) that I thought might benefit from a little graphical support was my contention:

“VIX data suggests the low volatility provides a foundation for extended bullish moves in stock. Look at the five highest and lowest average annual VIX readings and calculate the performance of the Standard & Poor’s 500 index one, two, and three years after the VIX extremes. After one year, the S&P performance following the low VIX is about 20% higher than after the high VIX. For two years, the difference jumps to 40% and by the third year the cumulative performance differential is approximately 90%. Wariness aside, low volatility begets low volatility and is generally bullish for stocks.”

Now there are two ways to compare percentages and the best way for me to illustrate this is with an example.  If we are comparing 5% with 4% is the 5% value 25% higher than 4% or is it 1% higher?  You can make a case for either comparison, one of which is made with division and is more of a pure percentage calculation, while the other which is made by subtraction and is perhaps best thought of in terms of percentage points.  In the Barron’s article, I used the division/percentage method, which is the norm when comparing numbers that are not percentages in and of themselves.  This time around I will try to minimize confusion and use the subtraction/percentage points approach instead.

In the first of the two graphics below I have calculated the SPX 1-year, 2-year and 3-year returns following the years with the five highest average VIX values (2008, 2009, 2002, 2001 and 1998) with a dashed black line as well as the years with the five lowest average VIX values (1994, 1993, 2006, 2005 and 1994) with a solid double blue line.  In all three time frames, the better returns followed the lower VIX readings and I used a green area series to show the (percentage point) difference.

[source(s):  CBOE, Yahoo, VIX and More]

For comparison purposes, in the second graphic below I have plotted the same SPX 1-year, 2-year and 3-year returns following the years with the ten highest average VIX values as well as the years with the ten lowest average VIX values.  Once again, in all three time frames, the better returns followed the lower VIX readings, though in this instance the performance gap between the lower VIX readings and higher VIX readings is somewhat reduced.

[source(s):  CBOE, Yahoo, VIX and More]

I offer up these graphics because I maintain that there are many skeptics regarding not only the persistent clustering of low VIX readings, but also related to the lack of robust data showing the effect of mean reversion during low volatility regimes.  As I have noted previously, mean reversion is much more predictable and tradeable following a VIX spike than after a significant decline in the VIX.

Follow me on Twitter at:  @VIXandMore

Related posts:


Disclosure(s): the CBOE is an advertiser on VIX and More
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Saturday, February 18, 2017

Putting Low Stock Volatility to Good Use (Guest Columnist at Barron’s)

With spring training just getting underway in Florida and Arizona, I think it is appropriate that I once again have an opportunity to pinch hit for Steve Sears in his The Striking Price column for Barron’s.  Today’s column is called Putting Low Stock Volatility to Good Use (my title suggestions always seem to end up on the cutting floor) and builds upon some of the ideas I presented three years ago in Low Volatility:  How to Profit from a Quiet VIX.

If my memory is correct, this is the twentieth time I have been a guest columnist at Barron’s in this fashion and in keeping with tradition, I always try to make the column topical, particularly when there are some aspects of volatility that have investors more perplexed than usual.  Lately, it has been the persistent low VIX readings (including the first sub-10 VIX print in a decade) in conjunction with a new administration and extremely high policy uncertainty that has been difficult for investors to digest.  While I too have dedicated a fair amount of effort to square low volatility with high policy uncertainty, my research related to volatility has made it easier to stick with the trend instead of trying to anticipate a market turn.

Specifically, in the Barron’s article I note:

“Statistically, it turns out that the vaunted mean-reverting aspect of volatility is much more likely to kick in with a high VIX than a low VIX. Similarly, low volatility tends to cluster and persist for extended periods, defying skeptics. Specifically, when the VIX dips below 12 for several months, the historical record shows it can be expected to continue with similar readings for two years or more.”

As Barron’s is not necessarily the best place to try to shoehorn original research into a short column, I thought I could use this space to expand upon some of the points I made.  Specifically related to the clustering of low volatility, the graphic below shows that when the VIX closes below 12, it tends to persist in these low readings, clustering for several years, before remaining above 12 for even longer periods during high volatility regimes. 

[source(s):  CBOE, VIX and More]

A corollary to the above is that while investors often focus a good deal of their VIX analysis on mean reversion, it is important to note that mean reversion is much more predictable and tradeable following a VIX spike than after a significant decline in the VIX.

There are some other interesting statistics and ideas in the Barron’s column that I will address in other posts shortly, not the least of which addresses the performance of the SPX in the years following extreme high and extreme low VIX readings.  Stay tuned.

Finally, since I enjoy being a pinch hitter so much, I thought I might highlight one pinch hitter for every new Barron’s column I write.  This time around I’d like to put the spotlight on Rusty Staub, who just happened to be at the zenith of his pinch-hitting duties when I moved to New York.  In the twilight of his career, the charismatic Rusty tied a National League record in 1983 with eight consecutive pinch hits and also tied the Major League record with 25 RBI from those (24) pinch hits.  Rusty finished his career with exactly 100 pinch hits and is currently 19th on the all-time pinch hit list.  I realize I have a long way to go to get to Rusty’s rarefied air, but 100 pinch hits is something to shoot for.

Related posts:

A full list of my (20) Barron’s contributions:





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