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 | 2714474 vinu02
vinu02's picture

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


Fri, 08/17/2012 - 12:51 | 2714530 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 | 2714535 falak pema
falak pema's picture

Fat tails in the mail !

Fri, 08/17/2012 - 13:47 | 2714690 DoChenRollingBearing
DoChenRollingBearing's picture

Two things are going up: platinum and US debt:


Fri, 08/17/2012 - 21:21 | 2715921 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 | 2714549 resurger
resurger's picture

Thanks , ill go long VIX today.

Are you still facebooked?

Fri, 08/17/2012 - 21:22 | 2715925 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 | 2714631 Precious
Precious's picture

Investment tip just for you, dude. 

Fri, 08/17/2012 - 13:46 | 2714721 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 | 2715055 Nobody For President
Nobody For President's picture

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

Fri, 08/17/2012 - 15:52 | 2715094 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 | 2714480 fonzannoon
fonzannoon's picture

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

Fri, 08/17/2012 - 21:24 | 2715926 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 | 2714483 Winston Churchill
Winston Churchill's picture

Shearing of Muppets scheduled for September.

Only machetes allowed.

Fri, 08/17/2012 - 12:45 | 2714494 fonzannoon
fonzannoon's picture

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

Fri, 08/17/2012 - 16:28 | 2715263 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 | 2714499 JeremyWS
JeremyWS's picture

Longed VIX futures at 13.5 earlier.

Fri, 08/17/2012 - 12:50 | 2714527 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 | 2714541 fonzannoon
fonzannoon's picture

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

Fri, 08/17/2012 - 13:12 | 2714607 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 | 2715932 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 | 2714501 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 | 2714506 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


Fri, 08/17/2012 - 12:48 | 2714511 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 | 2715066 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 | 2714514 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 | 2714548 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 | 2714608 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 | 2714518 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 | 2714540 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 | 2714550 fonzannoon
fonzannoon's picture

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

Fri, 08/17/2012 - 13:10 | 2714597 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 | 2714564 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 | 2714783 drivenZ
drivenZ's picture

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

Fri, 08/17/2012 - 21:36 | 2715943 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 | 2716458 samcontrol
samcontrol's picture

dto is a no brainer at these levels.

Sat, 08/18/2012 - 10:45 | 2716459 samcontrol
samcontrol's picture

dto is a no brainer at these levels.

Fri, 08/17/2012 - 12:50 | 2714522 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 | 2714539 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.



Fri, 08/17/2012 - 12:54 | 2714544 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 | 2714555 fonzannoon
fonzannoon's picture

They need Draghi to drop a rumor.

Fri, 08/17/2012 - 13:08 | 2714588 fonzannoon
fonzannoon's picture

They just debunked the SPR rumors. Lame attempt.

Fri, 08/17/2012 - 12:57 | 2714551 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 | 2715074 Brynjo
Brynjo's picture

Its called the MOVE index, calcluated by ML.

Fri, 08/17/2012 - 12:59 | 2714554 Squid Vicious
Squid Vicious's picture

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

Fri, 08/17/2012 - 13:00 | 2714557 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 | 2714590 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 | 2714594 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 | 2714686 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 | 2714735 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.

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