VIX remains low despite 5 days of declines

by Jay Pestrichelli on September 26th, 2013

In a conversation with a client yesterday, the topic came up about how little the VIX, CBOE’s volatility index, has moved despite 5 consecutive down days in the S&P 500. The SPX was lower by 1.9% from the close on Sept. 18th to Sept. 25th, yet the VIX only moved from 13.59 to 14.01 (3.1%) over the same period. 
Historically speaking when the S&P 500 is lower by 1% you can expect the VIX to rise by 6%. That isn’t an exact science, but it is a decent rule of thumb. However, this recent move has seen a ratio significantly lower than that. So we looked back over the last 3 years to see what has happened with the VIX any time the S&P was lower 5 or more days in a row. Here are the results:
Indeed the most recent 5 down days have resulted in a small pop in the VIX compared to the market decline, but not the lowest. November 2011 saw a lower percentage move up in the VIX compared to the drop in the S&P 500 (see blue outlined cells in the table above). However, in that circumstance the drop in stocks was much greater at 7.9% compared to the 1.9% we’ve just experienced.
That leads us to look at the amount the S&P 500 has declined: only 1.9%. This same drop occurred exactly a year ago in September 2012 (see green outlined cells in the table above).  But at that time the VIX, that started at just about the same level of 13.7, rose by 22.9% to 16.8. This is dramatically different than what we’re seeing now.
One last data point that jumps out, the actual change in percentage for the VIX of just 3.1% is dramatically lower than any of the other times the market sold off 5 days in a row (see red outlined cell in the table above).  
What does all this mean? It means that indeed the VIX is lower than it would typically be for a 5 day decline. This is a direct reflection of options premiums being lower than they typically would be. So for those waiting to purchasing options for hedging or speculation you’ve been given a little bit of a break or a gift. Option premiums should be higher if history had anything to say about it. I wouldn’t be surprised if the VIX jumps higher today regardless of what the market does as traders will try to seize this opportunity.
For those of you selling options for income generation now is probably not the time to do it. If you follow a buy low and sell high approach to investing, then selling options now, while at the low, doesn’t necessarily make a lot of sense. Pick your entry times and make sure the premium you’re trying to generate is consistent with whatever discipline you’re following.

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