Single-Digit VIX?

Could we see a single-digit closing value for the VIX Index soon?

While many in the market are probably not even aware that the VIX Index has closed below $10.00, the measure of the market’s expectation for 30-day implied volatility for the underlying SPX Index has dipped below the $10.00 level on nine occasions, or 0.15% of the time, since January 1990 when VIX Index data is readily available.VIX Single Digit Frequency

data sources: CFE, Yahoo Finance and Differential Research LLC

Since 1990, these extreme levels for the “fear gauge” have occurred during two distinct low volatility periods.VIX Index single digit closes

 data sources: CFE, Yahoo Finance and Differential Research LLC

The first period from December 1993 to January 1994 included 5 trading days where the VIX closed with a $9.00 handle including the index’s lowest reading of $9.31.

VIX Index and SPX 20d RV 11231993 - 02281994 VIX below 10

data sources: CFE, Yahoo Finance and Differential Research LLC

The second and more recent period includes 4 VIX closes below $10.00 between November 2006 and January 2007. The last single-digit reading of $9.89 occurred on January 24, 2007 just weeks before the first tremors of the 2007 – 2008 “financial crisis”.

VIX Index and SPX 20d RV 10192006 - 03162007 VIX below 10

data sources: CFE, Yahoo Finance and Differential Research LLC

Notably, both periods of single-digit VIX closes seem to have two characteristics in common, characteristics which arguable are in place today.

The first has to do with the calendar. Both periods of single-digit VIX closes took place over the November – January period or roughly over the winter holidays. While we look at the past twenty trading days to calculate realized volatility for what is approximately a monthly period, we look at 30 calendar days forward to calculate a month’s worth of implied volatility. The winter holiday period includes four extra-holidays, three of which occur within a thirty day period. The exchanges also close early the day after Thanksgiving and on Christmas Eve.

The second common factor is very low SPX 20-day Realized Volatility readings. In 1993 realized SPX volatility hit a low of 4.97% on December 23rd having spent much of the year in single-digits. Likewise SPX realized volatility remained below 10% for most of 2006 with the lowest readings near 6.00%

So where are we now?

VIX Index and SPX 20d RV 11192012 - 11192013

data sources: CFE, Yahoo Finance and Differential Research LLC

Well we are heading into the holidays.

  • Thanksgiving Friday                        November 29 2013 – early close
  • Thanksgiving Day                            November 28, 2013 – exchange holiday
  • Christmas Eve                                  December 24, 2013 – early close
  • Christmas Day                                  December 25, 2013 – exchange holiday
  • New Year’s Day                                January 1, 2014 – exchange holiday
  • Martin Luther King’s Day              January 20, 2014 – exchange holiday

Likewise SPX 20-day realized volatility has remained below 10% for much of the year with readings in the 6% range as recently as August.

If we are going record a single-digit VIX close it will require the SPX to close virtually unchanged (or slightly positive) several days in a row but could occur between Thanksgiving and Christmas.

Finally, I will be teaching a two-day course “Trading Volatility” in London December 5th and 6th and have limited availability to meet in London on December 4th. Let me know if you would like to meet me in London. Click the link for details.

data sources: CFE, Yahoo Finance and Differential Research LLC

The risk of loss in trading commodity futures and options is substantial. Before trading, you should carefully consider your financial position to determine if futures trading is appropriate. When trading futures and/or options, it is possible to lose more than the full value of your account. All funds committed should be risk capital. Past performance is not necessarily indicative of future results.


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I will be Teaching a class on “Volatility Trading” in London December 5-6, 2013

Volatility Trading

The growth of pure volatility trading has exploded over the past decade, primarily driven by substantial volume growth in publicly traded products based on the CBOE Volatility Index (VIX) Index. This two-day course provides the necessary tools for investors to effectively measure, interpret, and manage volatility. From volatility as a risk measure to Risk-On/Risk-Off (RORO) as an investment strategy, the mathematical concepts of volatility will be covered in a visual and easy to comprehend format. Topics include option valuation, volatility surfaces, and trading options. Asset volatility, variance swaps and the VIX will be covered in detail, leading to a discussion of the unique properties of the various tradable pure volatility products.

December 5 to December 6, 2013
Duration: Two days (9.00am to 5.00pm)
Location: Apex City of London Hotel – London, UK
Trainer: Michael McCarty
Course fee: £1890 + VAT – Register online

Course Outline

Risk and Volatility

+ Normal Distributions, Volatility and Variance
+ Volatility in the investment world: Batchelier to Samuelson
+ A marriage of convenience: MPT, Efficient Markets and Options Theory
+ The return of “Animal Spirits”, the Behavioralists and non-normal distributions

Trading Volatility Old School: The Volatility of an Option

+ Strikes, Models and Greeks
+ Volatility in 3-dimensions: The volatility surface

Trading Volatility New School: The Volatility of an Asset

+ Negative Correlation of Asset Returns and Asset Volatility
+ At the Money volatility and the First VIX – a portion of the surface
+ The Variance Swap – A slice of the surface
+ The “New” VIX calculation – the publicly traded slice

Tradable Volatility Securities Markets

+ The “Strip” and VIX Settlement
+ VIX Futures
+ VIX Options
+ Volatility Exchange Traded Products
+ Over-the-counter Products

Properties of Volatility

+ Behavior of volatility over time
+ Informational Content of Volatility: realized and implied
+ Volatility and Correlation

Trading Volatility: Risk-on/Risk-Off

+ RORO in Mean Variance Space
+ RORO in the MPT World
+ RORO with options
+ RORO with volatility products

Hot Topics in the “Vol” World

+ Volatility, Interest Rates and the VIX futures forward curve
+ The elephant in the room, how ETP’s trading effects volatility markets
+ Bloomberg Terminal Volatility Functions
+ Risk Parity Portfolios
+ Risk Neutral Density Functions

Digiprove sealCopyright secured by Digiprove © 2013 Michael Mccarty