Monday, August 8, 2011

08/08/2011: What VIX tells us about today's markets meltdown

Let's chart what I called the Roy Lichtenstein-styled "KABOOM" moment for the markets today. Recall that by definition the CBOE Volatility Index (VIX) is "a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Since its introduction in 1993, VIX has been considered by many to be the world's premier barometer of investor sentiment and market volatility."

Now, basically, VIX is as close to a pure price risk bet as we have. Again per CBOE: reported VIX index values represent "market estimate of expected volatility that is calculated by using real-time S&P 500 Index (SPX) option bid/ask quotes. VIX uses near-term and next-term out-of-the money SPX options with at least 8 days left to expiration, and then weights them to yield a constant, 30-day measure of the expected volatility of the S&P 500 Index."

Now to the charts.

Starting from the top, we have actual VIX itself - today's close at 48.00 which was:
  • Still well below the historical max of 80.86 attained on 20/11/2008
  • Well ahead of the historical average of 20.35 or January-2008 to present average of 27.21 or the average since January 2010 of 21.11
  • Today's close VIX reading was 63rd highest daily reading for the entire history of the series and the highest since January 2010
  • All 64 top readings (equal or above that attained today) were recorded in the period since January 2008.
Today's intraday spread of 35.65% is below Friday intraday spread of 45.52. However, the two readings are quite extraordinary:
  • Intraday spread average for historical series is 3.01%, while since January 2008 through present intraday spread averaged 9.06%.
  • Today's spread was 7th highest in history of the series, the 5th highest since January 2008 and the second highest (after last Friday's) since January 2010.
  • Friday's intraday spread was the 5th highest daily spread in the history of the series and the 4th highest since the crisis start (January 2008)
To see just how extraordinary last couple of days are, consider two time horizons for volatility in VIX itself:
and a shorter horizon:
3mo dynamic standard deviation for today's close is only 433rd highest reading in the series history and the 60th highest since January 2010, while 1mo dynamic standard deviation is the 56th highest over entire history and the 5th highest since January 2010.

However, in terms of daily percentage changes, today's rise of 50% is the fourth highest daily increase since the beginning of the VIX history and the highest since January 2008.

In terms of 1mo dynamic semi-variance (measuring only variance for the days of increasing VIX index, in other words - only for those days when risk rises), the last chart above clearly shows that we are in for a treat in these markets.
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