Market Measures

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Implied Volatility as a Predictive Measure

Market Measures

We can use the VIX to gauge the future volatility in the S&P 500. Today we look at how well the VIX has been at predicting future volatility.

Study
  • S&P 500 (SPY) and S&P 500 IV (VIX)
  • 2005 to present
  • Computed and compared 30-day moves that were predicted by VIX to actual moves in SPY
  • Compared selling 1 Standard Deviation Strangle (16 deltas on each side) in SPY managing @ 50%
    • Compared at various percentiles
Results
  • VIX is often used to measure future volatility and future movement in the S&P 500.
  • Historically, this measure has not been very accurate at IV lows or highs, usually overstating movement in the market.
  • Selling premium in the S&P 500 via short options has been one way to profit from this disparity.

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