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Volatility Spikes Higher (But Not High Enough) at Trader’s Narrative





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Usually I try and avoid pontificating on the VIX because Bill over at VIX & More does a fantastic job of examining volatility in all its shapes and sizes. You could say that he picks up the VIX by its scrawny neck and bashes it about until the poor statistical measure gives up every drop of market insight it has and more. If you haven’t yet to discover his blog, I highly recommend you read it regularly.

I’m sure that Bill will excuse this slight incursion…

As the market fell yesterday, it caused the volatility (VIX) to spike higher and close slightly under 19. This is high but not high enough to show real fear.

In the past few years, when the VIX has reached 20 and above, we tend to find some sort of footing and rebound (see graph below). The most recent example of this occurred in early March 2007 when the VIX hit an intra-day high of just above 20.

I find it a bit strange to talk about volatility highs or spikes in the 20’s range. Not that long ago that was nothing! Real volatility spikes registered in the mid 40’s. Things sure have changed. If we then go back even further in time, to the mid 1990’s, we again find ourselves in today’s volatility scenario where 20 is high enough to cause short term and intermediate term bottoms.

Are We There Yet?

This is why we can’t only look at the VIX’s nominal readings. Over time the landscape changes and what once was considered “high” is no more. A simple way to iron out such possible distortions is to look at the distance that the VIX is from some daily moving average (see bottom most graph).

I like the 50 moving average but you can use any reasonable number really. Putting the VIX through this moving average filter, we see that it still isn’t high enough. It is close. But just… ehn, ehn, under it.

Which means that we could very well spike higher from here and fall further down. But the good news is that theoretically, the VIX doesn’t have to go much higher or the market fall much further before we find an extreme reading from the VIX.

Causes of Low Volatility
For those curious enough to wonder why the volatility is so muted, everyone has their theories. Mine is that it is due to mainly two new forces:

One, the rise of the program buying/selling which parses prices and movement into finer and finer increments to squeeze out alpha. And two, the rise of gargantuan amounts of money to eek out bond like yields (in a low yield environment) from selling options. The massive amounts of options which these funds have to sell day in, day out increases supply and therefore, volatility.

Click to Enlarge Graph:

volatility rises july 2007.png

Now that you’re done reading my take on things VIX-wise, go read what Bill has to say.

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One Response to “Volatility Spikes Higher (But Not High Enough)”  

  1. 1 VIX Distance From Moving Average Is Bullish


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