Just How Low Can VIX Go?

Includes: UVXY, VXX, XIV, ZIV
by: Jay Wolberg

If you've been watching the markets lately and noticed that VIX has been spending some time in the 12s, you might be wondering just how much lower will VIX go?

Friday's VIX close of 12.9 certainly sounds low but to put it in perspective let's take a look at the actual historical (realized) volatility of the S&P 500 (NYSEARCA:SPY) over various time frames.

Historical Volatility (current)

Past two weeks (HV10) 6.85
Past Month (HV21) 6.20
Past 6 weeks (HV30) 11.55
Past 3 Months (HV63) 12.52
Past 6 Months (HV126) 11.49
Past Year (HV252) 12.84

Now let's take a look at the HV at a point in time 1 year ago:

Historical Volatility (as of 2/1/2012)

Past two weeks (HV10) 7.61
Past Month (HV21) 8.65
Past 6 weeks (HV30) 12.99
Past 3 Months (HV63) 21.22
Past 6 Months (HV126) 29.89
Past Year (HV252) 23.26

As you can see, the last year of trading has experienced much less volatility than the previous year. Note that the spot VIX on 2/1/2012 was 18.55, which at the time fell in the range between HV30 and HV63. If you look at today's HV range you'll see that a VIX of 12.9 is priced at a pretty reasonable point given the past year's levels of volatility.

Below is a graphical view of this progression of HV over the past year:

HV for the S&P 500

To give you one more interesting data point, let's take a look at the HV on 1/24/2007 when spot VIX closed at 9.89.

Historical Volatility (as of 1/24/2007)

Past two weeks (HV10) 6.68
Past Month (HV21) 6.82
Past 6 weeks (HV30) 6.34
Past 3 Months (HV63) 7.26
Past 6 Months (HV126) 7.35
Past Year (HV252) 9.69

So can VIX go lower? Absolutely - with another 30% to fall before reaching the 6-year low!

This is why it is critical to not assume that volatility will rise just because it is "low" relative to the recent past. When trading volatility ETPs such as the VIX Short Term Futures (NYSEARCA:VXX), 2x VIX Short Term Futures (NYSEARCA:UVXY), Inverse VIX Short Term Futures (NASDAQ:XIV), and Inverse VIX Medium Term Futures (NASDAQ:ZIV), you always need to consider the shape of the VIX futures term structure and each point's value relative to VIX as well as historical volatility in order to make informed trading decisions.

Disclosure: I am long VXX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.