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Short vs. Long Term IV?

Market Measures

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Long term volatility (VXV) is greater than short term volatility (VIX) 87% of the time. When short term volatility goes above longer duration volatility, could this be a trade indicator, either bullish or bearish?

Today, the tastytrade Research Team analyzed times when the VIX (30 day IV) goes above the VXV (90 day IV). We can look at this as a ratio of IV. For this study we looked at:

  • VXV and VIX
  • 2007 – Present
  • Analyzed multiple metrics around occurrences of this ratio
  • SPY returns in a 1 week and 1 month time frames before and after ratio occurrences above 1.
  • Short 30 Delta Puts, 45 DTE, held to expiration

The movements in SPY after a ratio above 1 were really no different from the occurrences below 1. The movements before a ratio of 1 proved that a selloff does trigger this volatility backwardation.

The Put results showed higher credits collected with a ratio above 1, but ultimately, the results were similar.

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