Most news about the VIX in recent months has been related to the historically low levels observed since the US Presidential election last November.

As noted previously on the tastytrade blog, the VIX dropped below 10 for the first time in about a decade in February 2017.

Given that backdrop, what's most surprising about the latest development might be the direction of the move, as opposed to the size of it. In the wake of the French elections on April 23rd, the VIX dropped about 26% on the first full day of trading.

Let that reality sink in for a moment. Volatility had been historically depressed for nearly six months, and we are now talking about a severe sell-off in one of the best-known fear metrics.

It should be noted that the VIX had been slowly creeping higher in April 2017. The VIX got above 16 in the weeks prior to the French election, but that was still well below its historical average of around 19.

On April 21st the VIX closed at 14.63. By the end of the day on April 24th (after the election), the VIX had crashed down to 10.84. An eye-popping 26% drop, and good enough to land it on the top-ten list of the biggest one-day sell-offs in VIX history.

In percent terms, the two biggest down moves in the VIX occurred in May 2010 and August 2011 when the gauge fell 29% and 27% respectively. In absolute terms, the VIX swooned heavily during the Financial Crisis, when it crashed from 70.33 to 52.97 in October of 2008, a drop of 17.36 points in one day (about 25%).

While the VIX's drop in April 2017 of less than 4 absolute points may not seem quite as dramatic as that day in 2008, there are some further aspects of recent trading history that make it intriguing.

The passing of two other global democratic events in the last year also caused the VIX to drop like a rock.

The conclusion of the "Brexit" referendum in June of 2016 saw the VIX down 23%. Similarly, the announcement of the results from the US Presidential election last November catalyzed a 21% sell-off in the VIX.

What's interesting is how the actual movement in broad market indexes has become more muted with the passing of each democratic event (referendum or election).

For example, after Brexit, the SPY actually did make a dramatic move lower for several days before ultimately recovering and going higher. In the case of the election of Donald J. Trump as President of the United States, equity futures collapsed overnight, but recovered in full and proceeded to rally after the open.

In the case of the French elections, the SPY skipped the down move altogether and simply staged an impressive two-day rally.  

No matter your specific strategy or approach in the market, what does seem clear is that any future democratic referendum/election in the US and/or Europe should be circled on the calendar with a red pen.

If the pattern holds, we might see yet another sizeable drop in the VIX. If the pattern deviates, that too would be an important data point.  But that still doesn’t mean we’d want to short the VIX ahead of one of these events.  The sell-offs don’t offer enough potential profit to offset the potential spike in the VIX if the market interprets one of these election events differently.  


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.