In late June, the VIX added 5 points in 2 trading days and broke above 20 for the first time since February. As volatility traders, spikes in the VIX are important to follow; much like shark fin sightings are important data points for surfers.
However, just like mistaken sightings in the ocean, not all moves in the VIX are the same. A topic that was covered thoroughly in a recent episode of Market Measures.
During the financial crisis of 2008, I had the pleasure of watching the VIX in real time.
To say it was a unique period in the history of derivatives trading would be a fairly significant understatement. It was madness, plain and simple.
It’s important to note that before September 2008, the VIX had never expired (closing price for a monthly contract) above 28.40. The VIX closed each of the last three months of 2008 above 50, with a high print of 80+ during one particularly brutal moment.
Fast forward to June, and we had the VIX spiking 5 points due to fears associated with the possible departure of Britain from the European Union. One has to seriously wonder if the world is facing the same degree of unknown risk in the system as compared to 2008.
Having said that, the recent pop in the VIX certainly isn’t one to ignore, and a recent episode of Market Measures takes a long look at what it all might mean in terms of historical context.
Titled "Fading Fear | Trading After Large VIX Moves," there can be no doubting the relevance of this topic given the market’s early summer selloff and subsequent snap-back.
The hosts of the show, Tom Sosnoff and Tony Battista, point out that before the referendum in Britain, the VIX crossed its historical average of about 19.5 (the Skew Index also traded at the high of the year). The spike in the skew index tells us that put buying as compared to call buying was the most skewed toward puts as compared to any other period of 2016.
The question the Market Measures team asked themselves is whether spikes like this in the VIX are predictive of future movement in equities.
In order to answer this question, a tastytrade study was constructed using the following parameters:
Compared SPX and VIX
Using data from 1990 to present
Tracking single-day VIX moves of 4 points AND when VIX moves from below long term averages to above long term averages
Tracked SPX performance over days and weeks after VIX spike
Interestingly, the study found only 18 instances in which the above conditions occurred in unison over the last 25 years.
The data below shows the average movement of the VIX and SPX both 1 day and 5 days after the conditions described above were met:
As you can see, the aftermath of such moves generally involved both the VIX and the SPX drifting lower.
The question then is how traders might position their portfolios going forward. And the answer of course depends on your existing portfolio, your exact strategy, and your interpretation of ongoing risks in the market.
If you have any questions or comments on the recent move in the VIX we hope you'll reach out at firstname.lastname@example.org.
Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.