VIX and VXX: Pretty Normal for a Monday

Almost exactly three months ago, I wrote about how there is a pattern to VIX compared to days of the week, controlled for the stock market’s gain or loss that day. I bring that topic up again today, as there was a pretty big drop in VIX last Friday, and there’s a pretty big move up in VIX today.

While that large gain in VIX may have some people panicking, realize that VIX’s reaction is almost dead on trend. As of 1:00 p.m. ET, the S&P 500 is off -2.50%. Based on the regression I did back in March (equation shown in charts at the link above), we should see a VIX gain of +3.11 points when a selloff of this magnitude occurs on a Monday.

The current gain in VIX is +3.65 points, so VIX is ever-so-slightly higher than trend. That is, it’s a non-event. Certainly, there is no uncharacteristic behavior among option traders, at least at this point in the day.

But that’s not what they’re saying at CNBC. When you hear statements like, “People don’t know what to do”, realize that the options market is actually behaving just as it always has. Traders are doing exactly what they typically do. And when you read, “A reading of 30 or better is generally indicative of high volatility and seen as a bearish sign for the broad-based Standard & Poor’s 500 index”, realize that what would truly be extraordinary would be if VIX did not rise back above 30%. These folks are drawing a conclusion from something that is completely … normal.

What’s also typical is that VXX is only up 5% while VIX is up more than 13%. VIX futures are moving more slowly than VIX itself, which is exactly what you’d expect.

Not much out of the ordinary, and most certainly not an overreaction.