Yesterday on Volatility 411 I spoke about the VIX3M / VIX ratio. For old school volatility traders VIX3M is the relatively new ticker for VXV and this is a 3-month volatility index based on S&P 500 Index Option pricing.
VIX3M tends to close at a premium relative to VIX, but that spread narrows when there’s a bit more short-term panic in the markets. Full blown market concern is attributed to a condition where VIX3M is at a discount to VIX. Over the past 13 months the only occurrence where VIX3M dropped below VIX was in early April last year. Before that we have to go back to early November 2016. After both instances the stock market quickly climbed to higher levels, but when has that not happened over the past few years?
Either way, as the market seems a bit more skittish, it’s worth reminding everyone that VIX3M is often a leading indicator of where VIX is going. And when VIX3M is at a discount to VIX that shows the market expecting lower volatility and a lower VIX in the near future. To get VIX to move down, we usually have to have higher stock prices. All that logic results in an indicator that many volatility market followers swear by.