VIX Premium Ratio Finally Perks Up

This week may be a turning point. None of the indicators below are quite at extremes, and I am keeping my S&P volatility bias at neutral since I would rather be a little late than very early. However, notice that volatility sellers have been “right” since at least mid-April, [5] a trend which is far more likely to reverse sharply than to flatten out. The S&P 500 looks overbought on a price basis, [4] especially since rallies are historically less likely to tarry in that two sigma channel. The futures complex continues to stay on the skeptical side versus plunging spot IV index levels.[7] And the VIX Premium Ratio [8] is finally perking up - the current reading of 1.07 is the highest since April 17, a day that was followed by a 15% jump in the VIX.

Besides the layout change, I’ve added three charts this week. The price and Bollinger Band charts for SPX [4] and GLD [9] replace the price and IV Index charts; it is helpful to know when an asset has risen or fallen two standard deviations from its 50-day mean. The implied volatility indexes for the S&P 500, gold, oil, and USD/EUR are displayed in [3]. In the coming weeks, I plan to add charts for oil and the dollar/euro similar to those already provided for gold.

Short-term S&P 500 Volatility Bias: Neutral

2. Weekly Change - Stock, Commodity, and Volatility Indexes

3. Implied Volatility Indexes

4. S&P 500 Price and Bollinger Bands

5. S&P 500 Implied and Realized Volatility

6. S&P 500 Implied/Realized Volatility Ratio

7. Volatility Futures Term Structure

8. VIX Premium Ratio

9. Gold Price and Bollinger Bands

10. Gold Implied and Realized Volatility

11. Gold Implied/Realized Volatility Ratio

User's Guide

1. Comment. Highlights items of note in the data below along with our short-term volatility bias and any trading theses. The Expected Daily Move table displays the de-annualized price and percentage change in each underlying asset as implied by its volatility index, withinone standard deviation.
2. Weekly Change.Tracks the weekly percentage change in the assets listed and in their implied volatility indexes.
3. Implied Volatility Indexes. A one year chart of the implied volatility indexes for the S&P 500, gold, oil, and USD/EUR. Indexes for the Nasdaq 100 and Russell 2000 are omitted because of their tight correlation with VIX.
4. S&P 500 Price and BollingerBands. Tracks daily closing prices in SPX with an overlay of one and two standard deviation 50-day bands.
5. S&P 500 Implied and Realized Volatility. Tracks the 21-, 60-, and 90-day realized (or “historical”) volatility of the index and the 21-day lagged CBOE Implied Volatility Index ("VIX"). Realized volatility is displayed as the annualized standard deviation of lognormal returns over the period specified, and may be thought of as a backward-looking measurement of price behavior. Implied volatility is the annualized standard deviation of returns implied by option prices, and may be thought of as a forward-looking measurement of expected price behavior.
6. S&P 500 Implied/Realized Volatility Ratio. Tracks the ratio of 21-day lagged implied volatility (IV) to 21-day realized volatility (RV). This ratio asks how well IV from one month ago predicted the RV over the next 21 trading days (roughly, 30 calendar days). When IV correctly anticipates RV over the period, the ratio will hover near 1; we regard the area near 0.9 –1.2 as normal, given the persistence of a volatility risk premium in equity market derivatives. A ratio less (greater) than 1 indicates that the price behavior of the underlying asset was more (less) volatile than anticipated.
7. Volatility Futures Term Structure. Tracks the Friday closing prices of the Volatility Futures complex (VIX, VXD, RVX) for the two weeks prior, along with the spot levels for reference.
8. VIX Premium Ratio. Tracks the ratio of rolling three-month (VXV) to one-month (VIX) implied volatility. Periods in which one-month readings persist at an extreme premium or discount to three-month levels have tended to coincide with major market moves.
9. Gold Price and BollingerBands. Tracks daily closing prices in GLD with an overlay of one and two standard deviation 50-day bands.
10. Gold Implied and Realized Volatility. Tracks the 21-, 60-, and 90-day realized (or “historical”) volatility of the ETFand the 21-day lagged CBOE Gold Volatility Index ("GVZ").
11. Gold Implied/Realized Volatility Ratio. See #6 above; given the novelty of the VIX-style gold volatility index (GVZ) and the characteristics of the underlying, we do not yet have a range we regard as normal.

Comments

[Mad Hedge F...:]

Not much. The market has gotten so dead here that I have started watching Suzie Ormand to get trading ideas. So I’m not supposed to run large balances on my credit card? Who knew? A hedge fund friend told me that the market is now like watching a ball tossed in the air that is at the apogee of its move, just before the free fall begins. No news, with shrinking volume and volatility. General Motors (GM) isn’t a stock anymore, so all of the news flow there might as well be a History Channel documentary. You can only sell so many out of the money short dated calls on other stocks before bumping up against risk control parameters. Even if you do make money in these conditions, it is at the expense of a Maalox addiction to fight the multiple holes in your stomach. It’s not worth it. This is why I prefer to spend my summers mountain climbing or practicing my ballroom dancing. Please see my “Sell in May and Go Away” opus at (www.madhedgefundtrader...

Jun 10 10:45 AM

[Donald Ingram:]

Technicals have their place, however one can get 'bogged' down, or 'snowed' under by them. They then start to cloud the reason why they are there - as an assist to help you form an action based on whats between your ears and in the pit of your gut!
Nice charts - always like to look at "nice" charts.

Jun 10 11:30 AM

[Alex F.:]

Either I'm having a brain fart or you are constructing the implied/realized volatility ratio incorrectly.

Implied volatility is a measure of expected volatility over the next month.

Realized volatility is a measure of realized volatility over the previous month.

So today's realized volatility value corresponds to the implied volatility one month ago. Therefore, you should lag the realized volatility and not implied.

Jun 11 03:39 AM

[Condor Options:]

Alex, yes, today's realized vol corresponds to implied vol one month ago. So given today's realized vol, I want to know what the implied vol was one month ago, and that's what is reflected in the chart.


On Jun 11 03:39 AM Alex F. wrote:

> Either I'm having a brain fart or you are constructing the implied/realized
> volatility ratio incorrectly.
>
> Implied volatility is a measure of expected volatility over the next
> month.
>
> Realized volatility is a measure of realized volatility over the
> previous month.
>
> So today's realized volatility value corresponds to the implied volatility
> one month ago. Therefore, you should lag the realized volatility
> and not implied.

Jun 16 09:36 AM

[mgarrett:]

There has been extreme swings from premium to discount back to premium on VIX futures. The premium and/or discount has been extremely accurate over the past week or so. Do you believe that this reliability in the indicator can persist? In my view it may be working a little too well. So I am going dial back its influence on me.

Nov 05 11:03 PM