Daily Commentary - Posted on Wednesday, February 11, 2015, 5:12 PM GMT +1
The VIX® – A Rear-View Mirror Or Crystal Ball
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Most recently there has been a lot of chatter and discussion in the financial blogosphere regarding the CBOE Volatility Index (VIX®) soaring higher since December 5, 2014 when the index closed at its preliminary low of 11.82 (the index closed at 22.39 on January 15, 2015), despite the fact that the S&P 500 Index has (almost) always trading in short distance to its all-time high of 2,090.57.
But if you don’t think of (historical / realized) volatility in terms of daily closing prices only, but take into account intraday and day to day high / low prices as well, the solution might present itself.
Table 1 below shows the 1 month, 3 months and 1 year average, 1 standard deviation(s), maximum and minimum values of the 5-day exponantial moving average of the maximum of daily (intraday) ups and downs – blue line -, calculated as follows:
5-day EMA [ LN [ MAX (
- today’s intraday high / today’s intraday low ;
- 1 + ABS [today’s intraday high / yesterday’s intraday low – 1] ;
- 1 + ABS [today’s intraday low / yesterday’s intraday high – 1] ;
(in order to get positive values and absolute movements only)
With 2.01%, the current 1 month average is running way above the 3 months and 1-year average, with a very low standard daviation of 0.24%, and has never been lower than 1.56% over the course of the last month.
|Term||5-day EMA …
Image I below shows the 1-year relationship between the CBOE Volatility Index (VIX®) (red line) and the 5-day exponantial moving average of the maximum of daily (intraday) ups and downs (blue line).
Image I – VIX® vs. 5-day EMA [2-day Max. Intraday Volatility]
(02/10/2014 – present)
The high correlation between both curves is more than striking. The VIX® index mirrors the 5-day EMA of … very closely, independently if those bigger intraday swings happend on a monthly/annual/all-time S&P 500 index high.
Image II below shows the historical distribution (01/02/1990 – present) of VIX® values when the 5-day EMA of … closed between 1.75% and 2.25%, as it did most of the time over the course of the last month. On average the VIX® was trading at or around 20.82 , close to the average VIX® value over the course of the last month.
Image II – VIX® vs. 5-day EMA [2-day Max. Intraday Volatility]
(01/02/1990 – present)
In contrast: Image III below shows the historical distribution (01/02/1990 – present) of VIX® values when the 5-day EMA of … closed between 0% and 1.00%. With such low intraday swings, it should come to nobody’s surprise that the VIX® was trading between 12 and 14 almost 90% of the time.
Image III – VIX® vs. 5-day EMA [2-day Max. Intraday Volatility]
(01/02/1990 – present)
From my perspective the VIX® seems to be highly correlated to then then recent (realized) intraday volatility (looking into the rear-view), with market participants regularly expecting a continuation of this high/low intraday volatility. You will rarely see a low realized volatility (5-day EMA of … lower than 1.00%) in combination with a much higher VIX® value (acting a fear gauge representing market participant’s expectation of S&P 500 index volatility over the course of the then following 30 days), and vice versa.
Have a profitable week,
Disclosure: I’am long/short XIV, and long/short VIX, RVX and EURO STOXX 50 volatility futures.
Remarks: Due to their conceptual scope – and if not explicitly stated otherwise – , all models/setups/strategies do not account for slippage, fees and transaction costs, do not account for return on cash and/or interest on margin, do not use position sizing (e.g. Kelly, optimal f) – they’re always ‘all in‘ – , do not use leverage (e.g. leveraged ETFs), do not utilize any kind of abnormal market filter (e.g. during market phases with extremely elevated volatility), do not use intraday buy/sell stops (end-of-day prices only), and models/setups/strategies are not ‘adaptive‘ (do not adjust to the ongoing changes in market conditions like bull and bear markets). Index data (e.g. S&P 500 cash index) does not account for dividend and cash payments. The results are regularly based on simulated data and/or hypothetical performance and do not represent real trading.
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