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Hat tip collegetraderJason in the comments.
And back to the VIX.
16 full as I type, Roger Clemens might even touch it here. At the risk of belaboring the point, check out Sep options. The forward price (effectively the future price) suggests the market still expects the VIX to be 22 on September expiration day.
It is all about mean reversion, but as my insane friend Bill at VIX and More notes, “mean” is very tough to define.
Since much of the discussion of the VIX centers around 10 day moving averages, I thought I would zoom out a bit, pull up a VIX weekly chart, and look at some long-term numbers: the 40 and 200 week simple moving averages (click thru to see).
Logically, one might assume that most of the activity in the VIX would fall neatly in between the 40 and 200 week SMAs. Interestingly enough, that has rarely been the case historically. During the past five years, for instance, the VIX has traded in the range between the 40 and 200 week SMA less than 20% of the time, as the VIX has trended down, then back up.
At current levels, the VIX is near the halfway point between the 40 and 200 week SMA, perhaps partly due to some of the gravitational effect of mean reversion. While current levels of volatility appear to resonate as too low for some, a continuation of the bullish bounce off of the March lows should send the VIX back to the 200 week SMA – or even lower.
In sum, while long-term VIX mean reversion does have some analytical use, it is less reliable than the short-term mean reversion patterns that are more commonly utilized for trading.
The most common short term mean reversion indicator is the 10 Day MA. Any time the VIX gets 10% below (above) it’s 10 Day MA, the VIX is considered oversold (overbought). By this definition, the VIX is oversold now, And since the VIX basically moves in opposition to the market, it suggests the market is overbought by this metric.
Now the caveats.
It is expiration week. Moves in motion tend to stay in motion. Anecdotally, that can last until about Tuesday of next week.
Also, oversold VIX does not provide as good an indicator as overbought. Outright Fear tends to lead to big turns, outright disinterest can just linger.
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Vix with a 16 handle. Bought a bunch of options today.
just make sure they are *real* options, not VIX ones. But yes, seems like a good idea here.
Oh yeah. I don’t play with the VIX. Mostly QQQQ puts, a XLF straddle and otm TSO calls.
I wanted to buy some SMN calls but the spread is just too big. What’s your thoughts on large bid-ask spreads?
VIX to zero.
Yeah baby!
maybe it’s because greed takes longer to play out than fear.
Adam, are you aware of any studies done on the possibility of the vix being a leading indicator? for example, the tops of 5/06 – 2/07 – 7/07 – and 10/07 showed the vixs making higher lows. the bottoms 08/07 – 1/08 showed the vixs making higher highs. then the bottom of 3/08 the vix did not make a new high. thanks in advance.
clearly to zero.
The thing with the VIX as indicator is it will always be obvious in hindsight. Options are very cheap and bearish (for the market) now. But I could have said that for the past few weeks. And you can go back and find divergences that do and don’t work.
IMHO, I find it more concurrent with what you see in everything else. That is, if the VIX didn’t exist, it would still feel a little complacent and overdone here.
Correct me if I’m wrong, but the lack of volatility (ie. low VIX) has the greatest effect on the longest of options, yes?
So, in truth, we should be getting drunk and buying LEAPs here, no?
yes and no. This will sound confusing, but the volatility of a LEAP is not as ….volatile as that of an option with shorter duration. So yes, a LEAP will make (lose) more on every 1 pt. tick in volatility than a nearer one. But it is less likely to make that one point move.
I like longer term options more than shorter ones now, but keep in mind they have not declined as much as nearer ones (in volatility terms) and won’t lift as much (in volatility terms) if we ever get a little more action.
The LEAPs would have future higher volatility priced into them, no?
There is now way the VIX stays this low for the long term, so the premiums will reflect that sentiment…
yes, DPeezy is basically right. LEAPS carry a higher volatility right now, so a bit of an uptick is already priced in.
One thing I used to like to do on the long side (when I went “that way”) was to buy two year out LEAPs and then sell the short term calls against them. A cheaper version of covered call income writing strategy.
yeah, not a bad idea. The issue though is, depending on the specifics, you may have made a big bet on volatility going out 2 years.