Thursday, December 20, 2007

Stocks Down, Option Volatility (VIX) Down: What Happens Next

Interestingly, over the past five trading sessions, the S&P 500 Index ($SPX) has been down about 1.9%, but the VIX has also been down 8.8%. I went back to the start of 2004 (N = 995 trading days) and found that the average VIX change when the five-day $SPX has been down more than 1% has been +16.46%. We've only had six occasions during that time in which $SPX has been down more than 1% over a five-day period and VIX has also been down. The S&P 500 Index was lower five days later on four of those six occasions, for an average loss of -.77%.

Indeed, when $SPX has been down more than 1% over a five-day period and VIX has been up less than 4% during that same time (N = 29), the S&P 500 Index has been higher only 7 times and lower 22 times over the next five trading days (average loss = -.84%). When stocks have been lower but options participants are displaying relative complacency, short-term returns have been subnormal.

RELEVANT POSTS:

* VIX and Daytrading Opportunity

* Volatility of the VIX
.

2 comments:

Alfred Chew said...

It seems to me the current fear among the Market Makers who determine the VI are greater than it was a year or 2 years ago.

Alfred Chew
http://www.mylevel2quotes.com/

Brett Steenbarger, Ph.D. said...

Yes, I do think we're seeing an uptrend in volatility, and some of that seems to reflect uncertainty--

Brett