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Why VIX Is So Low, And What Comes Next?

Tyler Durden's picture





 

VIX is nothing more than the market's implied 'factor' that makes the supply-demand of options prices fit with model-based parameters. In simple terms it measures the market's expectations for volatility (up or down moves - not just down) going forward. Empirically it has a relationship with realized volatility - how much the market actually moved up or down relative to what VIX expected - and professionals will use various 'scalping' techniques to lock in day-to-day gains from the difference between the market's actual movement and what options prices expected. To wit: the current expectations of central bank action, just as it did in 11/2011 (global CB action) and 1/2012 (LTRO1), has caused a slow steady leak higher in stocks which crushes realized volatility - currently at record lows. This in turn drags implied vol lower as the 'scalpers' sell vol to capture the difference. With September 'events' around the corner, we suspect there are only a few more days before realized vol picks up and implicitly implied vol momentum scalpers are squeezed out again.

SPY (the S&P 500 ETF) Realized vol (orange) is following the same collapse path (red ovals) as it did in LTRO1 lead-up and the global CB action in November. Clearly the market is not willing to chase realized vol all the way down and maintains a premium (lower pane) which it appears to be up against here...

The lower pane above is the critical part to understanding market expectations for a risk pick up.

 

Clarifying: VIX 'expects' a certain move per day and as long as the move is smaller than 'expected' then a daily profit can be garnered... of course this works every day day in and day out until it doesn't and the market (and realized vol) rips your arms and legs off (as we show with read arrows below)...

 

The bottom-line is that a low VIX must be compared to its realized vol to judge real exuberance/complacency... but we note that there is a floor to the premium vol sellers are willing to accept to take on the rip-your-arms-and-legs-off probability. While implied vol provides insight into expectations of risk ahead, it is the premium to realized vol that tells you the real story and currently that premium remains very high - in other words, the market IS expecting considerably more volatility ahead (lower pane of first chart above).

Charts: Bloomberg

 


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Fri, 08/17/2012 - 12:41 | Link to Comment vinu02
vinu02's picture

VIX is statistic, so just use it as hedge and not as investment.

http://www.freefdawatchlist.com/2012/08/buy-sell-or-hold-stock-levels-for.html

Fri, 08/17/2012 - 12:51 | Link to Comment MillionDollarBonus_
MillionDollarBonus_'s picture

The global recovery is really picking up. Todays plunge in the VIX indicates that investors are confident in the recovery, and see no need to hedge against the conspiratorial "tail risks" and "black swans" that doomer libertarians are constantly whining about. 

Fri, 08/17/2012 - 12:52 | Link to Comment falak pema
falak pema's picture

Fat tails in the mail !

Fri, 08/17/2012 - 13:47 | Link to Comment DoChenRollingBearing
DoChenRollingBearing's picture

Two things are going up: platinum and US debt:

http://tinyurl.com/9t4223o

Fri, 08/17/2012 - 21:21 | Link to Comment The Monkey
The Monkey's picture

The illiquid stock market, void of any bears (but plenty on the sidelines), falls on it's ass?

As expected, this market retraced almost everything :)

Fri, 08/17/2012 - 12:56 | Link to Comment resurger
resurger's picture

Thanks , ill go long VIX today.

Are you still facebooked?

Fri, 08/17/2012 - 21:22 | Link to Comment The Monkey
The Monkey's picture

Good call. Just hold at this point. Bulls have next to nothing left - a few days at best.

Fri, 08/17/2012 - 13:21 | Link to Comment Precious
Precious's picture

Investment tip just for you, dude. 

Fri, 08/17/2012 - 13:46 | Link to Comment MacGruber
MacGruber's picture

Nice one MDB! I don't know which is better, your perfectly crafted delivery or the down arrow folks give you for taking your comment at face value.

Fri, 08/17/2012 - 15:37 | Link to Comment Nobody For President
Nobody For President's picture

Right, he's a troll, but he's OUR troll...

Fri, 08/17/2012 - 15:52 | Link to Comment kalasend
kalasend's picture

No need to hedge or nothing worth hedging for?

The two are very different and with the kind of fund outflows I'm leaning towards the latter. 

Fri, 08/17/2012 - 12:42 | Link to Comment fonzannoon
fonzannoon's picture

TLT, right here? Green arrow for yay, red for nay..

Fri, 08/17/2012 - 21:24 | Link to Comment The Monkey
The Monkey's picture

You can probably buy and hold it for quite some time. I'll bet it has nearly 20% left at these prices (but it will take a while).

Fri, 08/17/2012 - 12:43 | Link to Comment Winston Churchill
Winston Churchill's picture

Shearing of Muppets scheduled for September.

Only machetes allowed.

Fri, 08/17/2012 - 12:45 | Link to Comment fonzannoon
fonzannoon's picture

Gartman talking about gold in terms of yen again...

Fri, 08/17/2012 - 16:28 | Link to Comment Whatta
Whatta's picture

Personlly, I prefer to price gold in Sauerkraut. Alternatively, in sea bass. It is doing well priced in sea bass.

Fri, 08/17/2012 - 12:46 | Link to Comment JeremyWS
JeremyWS's picture

Longed VIX futures at 13.5 earlier.

Fri, 08/17/2012 - 12:50 | Link to Comment slaughterer
slaughterer's picture

You have alot of guts, my friend.  This final wave up could go to ES 1428-1450.  With VIX below 13.  

Fri, 08/17/2012 - 12:53 | Link to Comment fonzannoon
fonzannoon's picture

I am amazed at people still commiting seppuku on here everyday with the vix

Fri, 08/17/2012 - 13:12 | Link to Comment resurger
resurger's picture

I cant wait to see the Fed prop desk and their minions closing out their shorts on Volatility...

S&P at 1,420 and VIX at 13.xx and low volume.

use your own judgment.

 

Fri, 08/17/2012 - 21:27 | Link to Comment The Monkey
The Monkey's picture

Trend change is in the air.

- treasuries
- shorts
- agency REITs invested in the long end trading near book (correct for interest rates and expect volatility).

Fri, 08/17/2012 - 12:47 | Link to Comment slaughterer
slaughterer's picture

The upcoming volatility could just be a drop to 1400 as much as 1300.  It is impossible to calculate the EXTENT of the future movement in ES from these graphs.  In any case, many HFs have been seling volatility all August.  

Fri, 08/17/2012 - 12:47 | Link to Comment adr
adr's picture

OT but good:

A CNBC article with a truthful headline and first paragraph. But the rest of the article goes on to say how California is seeing the greatest job growth of any state.

44 States see jobless rate increase

http://www.cnbc.com//id/48703191

Fri, 08/17/2012 - 12:48 | Link to Comment ekm
ekm's picture

VIX is applicable only if there is volume in the market.

If volume is very light like nowadays, VIX is irrelevant.

Fri, 08/17/2012 - 15:40 | Link to Comment ekm
ekm's picture

To put it in a different way, VIX measures Volatility, but it CAN'T measure COLLAPSE.

Volumes have collapsed. Volumes are NOT volatile.

Fri, 08/17/2012 - 12:51 | Link to Comment LawsofPhysics
LawsofPhysics's picture

Same as it ever was, all that now matters is rolling over debt and that is the tell for the next drop in equities.  Must... keep... a... bid... under... treasuries...

 

Fri, 08/17/2012 - 12:56 | Link to Comment kridkrid
kridkrid's picture

there kind of needs to be a bid under everything, no?  The daisy chain of interconnected debt is a sort of MAD, I think. 

Fri, 08/17/2012 - 13:13 | Link to Comment LawsofPhysics
LawsofPhysics's picture

Not really.  Compared to treasuries, equities can go up and down (it's a casino and the house always wins) but so long as the debt remains on the books, the treasury market is considerably larger and more restricted in terms of the volitility that is tolerated.  why else would so many sheeple put all their 401k money there?  It's "safer".  This is all about the dollar right now.  The American military backs the dollar, period, the treasury pays for the military hence keeping a bid under treasuries is far more important.

But I digress, I am in the "all paper is going to zero" camp anyway.  Just trying to collect more physical on the way there.

Fri, 08/17/2012 - 12:49 | Link to Comment slaughterer
slaughterer's picture

Is there anyone else here shorting WTI in the 95s or is it only me?

Fri, 08/17/2012 - 12:53 | Link to Comment HyperLazy
HyperLazy's picture

I thought about it. Sold off my oil position last week, decent gain. Sold off my XIV position last week as well @14. I honestly thought oil and XIV had topped...

Sitting in cash right now, just looking at stuff.

Fri, 08/17/2012 - 12:57 | Link to Comment fonzannoon
fonzannoon's picture

make sure to read up on money markets....tisk tisk.

Fri, 08/17/2012 - 13:10 | Link to Comment HyperLazy
HyperLazy's picture

LOL - I hear ya. I already pulled my May gains out in June and am considering to close one of my three accounts. I am acutely wary of the brokerages and clearing houses.

Fri, 08/17/2012 - 13:01 | Link to Comment fonzannoon
fonzannoon's picture

If the USD is so stong why is crude up so high? Why is the AUD at 105 and parity with the loonie?

Fri, 08/17/2012 - 14:10 | Link to Comment drivenZ
drivenZ's picture

Iran and lower than expected US crude inventory report the other day

Fri, 08/17/2012 - 21:36 | Link to Comment The Monkey
The Monkey's picture

Same dynamic as 2008, but this time the central banks have only jawboned (thus WTI has not yet spiked to $140...)

Sat, 08/18/2012 - 10:45 | Link to Comment samcontrol
samcontrol's picture

dto is a no brainer at these levels.

Sat, 08/18/2012 - 10:45 | Link to Comment samcontrol
samcontrol's picture

dto is a no brainer at these levels.

Fri, 08/17/2012 - 12:50 | Link to Comment buzzsaw99
buzzsaw99's picture

september the buffett puts expire so that's no good

october is the month leading up to the election so that's no good

november is black friday so that's no good

december is banker bonus month so that's no good

imo volatilty can't go wild until after the 1st of the year

Fri, 08/17/2012 - 12:53 | Link to Comment drivenZ
drivenZ's picture

you can also look at the steepness of the futures curve to come to this same conclusion.  Everyone knows we'll get some more volatility come September. Spot VIX is low but a few contracts out and the chart looks like a hockey stick.

 

http://soberlook.com/2012/08/vix-futures-curve-steepens-again.html 

Fri, 08/17/2012 - 12:54 | Link to Comment slaughterer
slaughterer's picture

Whitehouse confirms release of SPR oil as option a minute ago and oil futures do not react at all.  

Fri, 08/17/2012 - 13:00 | Link to Comment fonzannoon
fonzannoon's picture

They need Draghi to drop a rumor.

Fri, 08/17/2012 - 13:08 | Link to Comment fonzannoon
fonzannoon's picture

They just debunked the SPR rumors. Lame attempt.

Fri, 08/17/2012 - 12:57 | Link to Comment disabledvet
disabledvet's picture

How come there's no measure of "implied volatility" in the debt markets? Oh, that's right "they only move in one direction."

Fri, 08/17/2012 - 15:42 | Link to Comment Brynjo
Brynjo's picture

Its called the MOVE index, calcluated by ML.

Fri, 08/17/2012 - 12:59 | Link to Comment Squid Vicious
Squid Vicious's picture

S&P down one tenth of a handle... just BTFD right here... !

Fri, 08/17/2012 - 13:00 | Link to Comment GoldbugVariation
GoldbugVariation's picture

Excellent article.  I've been watching VIX for years and I never knew this, and it's explained very well here.

Fri, 08/17/2012 - 13:09 | Link to Comment Yen Cross
Yen Cross's picture

 Looking @ the top chart , [ spy hist vol.] looks like it 's due for at least a 23.6-38.2% retrace. If you look @ the first red circled area from Dec.-Jan..  The bottom pane also looks closely correlated. Thanks for the charts Tyler:)

Fri, 08/17/2012 - 13:09 | Link to Comment Thought criminal
Thought criminal's picture

I'm pretty curious how you guys here on ZH play the VIX. I'm thiking about buying one of the ETFs considering how low it is now and since options and not an option for me...

Fri, 08/17/2012 - 13:31 | Link to Comment Chappy
Chappy's picture

Lost my butt on TVIX, VXX.  They are pretty crappy unless your timing is perfect, mine is not.  They get hammered but only go up marginally when you expect them to spike.

 

My advice if you want to gamble is buy/sell mini-vix futures.  They are cheap, trade around they clock and actually move directly with the vix.  How low can it go right?

 

My other advice is to not take my advice.

Fri, 08/17/2012 - 13:51 | Link to Comment Thought criminal
Thought criminal's picture

I was thinking about shorting XIV first to avoid the counterparty risk of the ETF/ETN, but all the VIX bull ETFs seem to have much bigger gain potential so I guess I'll just take the chance.

Fri, 08/17/2012 - 14:04 | Link to Comment drivenZ
drivenZ's picture

the reason is because you aren't buying spot VIX. You're buying the futures curve which if it looks like it does now can be very steep meaning two or three months out there is still high volatility expectations lurking. Even if the VIX jumps, it may not jump as much as FUTURE vol expectations and you'll still lose $.

and with futures, you can certainly buy them but due to the steepeness of the curve the VIX still needs to clear 20 in the next ~two months to make $. 

 

Fri, 08/17/2012 - 13:19 | Link to Comment HyperLazy
HyperLazy's picture

http://vixandmore.blogspot.com/2012/08/how-can-vix-be-14-and-lower-than-...

Edit: This here article explains how VIX is calculated from VIN and VIF, plus how it rolls from month to month.

Fri, 08/17/2012 - 13:14 | Link to Comment houserich
houserich's picture

VXX, XIV, and ZH have been good to me.

Fri, 08/17/2012 - 13:22 | Link to Comment DUNTHAT
DUNTHAT's picture

VIX IS STD DEV OF SP500 OVER A YEAR.

ITS LOW BECAUSE NO ONE IS IN THE MARKET EXCEPT BEN AND THE BOYS.

HARD TO CREATE THE ILLUSION OF "VARIABILITY" WITH ONLY ONE PARTICIPANT!!

Fri, 08/17/2012 - 21:39 | Link to Comment The Monkey
The Monkey's picture

What's funny: those guys are slapping each others backs right now, thinking they have things under control.

Sometimes the rug gets pulled out from underneath everyone.

Fri, 08/17/2012 - 13:20 | Link to Comment put_peter
put_peter's picture

So the algos wont shake the market anymore and retailers are busted... what do you get...

Fri, 08/17/2012 - 13:22 | Link to Comment bIlluminati
bIlluminati's picture

Quarterly options expiration day today, and August is European vacation month. I'm backing the truck up on a low-beta portfolio. And by low, I mean less than zero.

Fri, 08/17/2012 - 14:08 | Link to Comment Son of Loki
Son of Loki's picture

"Groupon hits new lows."

"FB plunges again."

"Food stamp usage highest in 1,000 years."

"Crime rises in major cities."

"Consumer confidence up."

Rationality lowest in 30,000 years.

Fri, 08/17/2012 - 14:11 | Link to Comment Dollar Bill Hiccup
Dollar Bill Hiccup's picture

And He said : Thou shalt not hedge. And lo and behold, the market did rampeth, and the vol did evaporate and hardly a share was traded. And He saw this, and it was good.

That's how it works now in fiatlandia, boyz and girlz.

The wizard is in control and his minions, the machines, do his bidding.

Fri, 08/17/2012 - 14:31 | Link to Comment bobert727
bobert727's picture

Very Quiet Day....and according to my historical data...as of 2:30pm EST this is the smallest percentage high/low range in the S&P 500 Index since 1996....over 16 years!!!

 

A mere 0.216%

 

The calm before the storm........buckle in!

Fri, 08/17/2012 - 14:47 | Link to Comment Dollar Bill Hiccup
Dollar Bill Hiccup's picture

Or, you can start conversing with a volleyball. Just don't get too attached, would be my advice.

 

 

 

 

Fri, 08/17/2012 - 14:56 | Link to Comment gunsmoke011
gunsmoke011's picture

Well - at least there will be plenty of bidders to support the market judging from recent volume. Absolutely PATHETIC - and today is an options expiration - after the first half hour -- annnnnddd itt's gone!!! If for some reason these robots ever get caught in a negative feedback loop - this market iwll go no bid and the next stop will be ZERO!! Holding VIX calls however may do you no good - since when we hit zero, there will be no bid for those either. Like OEX options in 87 - you could be 60 points in the money and the bid would be $3.00 - and it is my understanding that IF there is a bid - they are only obligated to execute 10 contracts at that price. Don't know if that has changed - but that was the way it was as Walter use to say.

Fri, 08/17/2012 - 17:35 | Link to Comment smiler03
smiler03's picture

Thanks for explaining the meaning of the VIX. About the only thing I've learned about it from ZH in over a year is that it is completely meaningless and irrelevant to the world markets. 

Or am I missing something?

Fri, 08/17/2012 - 20:42 | Link to Comment Savyindallas
Savyindallas's picture

then go troll somewhere else-asshole

Fri, 08/17/2012 - 19:17 | Link to Comment luna_man
luna_man's picture

 

 

Hey!...MY MAIN MAN, you said a mouth full there, "it is the premium to realized vol that tells you the real story and currently that premium remains very high-"...

 

Be patient or keep adding to those "short" positions...Mr. "vix" is getting restless!

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