Volatility: It Just Is

From a capital markets "meta" standpoint, volatility just is. Volatility is a nondirectional, statistical measure of the dispersion of returns for a given security or index. It’s neither good nor bad. From an interpersonal and psychological standpoint, volatility typically connotes something very different than a rote calculation. Few people wake up looking forward to "volatility" in their day-to-day lives, but uncertainty is a constant whether you invest or not. Volatility just is. Of late, macro market volatility has been declining. Here’s a look at 10-day S&P 500® Index (SPX℠) volatility over the past two years:  

Inside Volatility Trading 11-12
Source: Bloomberg

  • Average 10 Day SPX vol Jan 2018 – Present: 13.68%
  • Average 10 Day SPX vol in 2019: 12.70%
  • Average 10 Day SPX vol in 2018: 14.53%

Realized, implied and expected volatility measures have come in meaningfully over the past few weeks. This stands to reason against the backdrop of yet another "punt" on Brexit, or as a Reuters article referred to it, a "Brexit flextension" (January 31, 2020), an arguably "strong" or well-managed earnings season in the U.S., accommodative monetary policy/stimulus on the part of global central banks, as well as renewed optimism surrounding the U.S.-China trade negotiations.

  • Average VIX® Index Jan 2018 – Present: 16.22%
  • Average VIX® Index in 2019: 15.74%
  • Average VIX® Index in 2018: 16.64%
  • Current VIX Index (11/8/2019): 12.50%

The Cboe VIX® Index is not tradable like VIX® futures and options. Cboe recently published a new 8-page VIX Futures and Options Fact Sheet that outlines many of the unique traits associated with the products.

Short-dated VIX® futures tend to be far more sensitive to changes in the VIX® Index. One of the more interesting developments of late is the relative "stickiness" of VIX® futures as compared to the index across maturities. In short, the term structure is steeper than it’s been in quite some time.

The chart below shows the spread between the front-month (standard) future and the VIX® Index going back 2 years. The November VIX® futures are trading at 2.07 over the current VIX® Index. The average spread between the front-month future and VIX® Index over the last two years is 0.299. 
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Source: Bloomberg

If we change our duration/spread (purple) to one year using VIX1Y (white line) and the index (green), the slope is even more pronounced. The VIX1Y has measured 18.53 on average over the past two years. The typical premium to the VIX® Index over that time frame has been 2.91.

The current premium is 6.55 and is the largest spread (positive) since early November 2017 (7.67). In brief, this is the widest spread between the VIX®Index and VIX1Y since late 2017, which was a year and period of exceptionally low realized volatility. 

Inside Volatility Trading 11-12 3
Source: Bloomberg

Historically, the S&P 500® Index tends to move higher in the months of November and December. According to Yardeni.com, the average percent change for the S&P 500 in November is +0.7% and December is +1.3%. That data goes back to 1928.

Over the last 20 years, according to Macro Risk Advisors (MRA), the average move for the S&Ps in the last two months of the year has been +1.9%. Last year was the exception to the rule, as the broad market declined by 7.6%.

Between October 31 and November 7, the S&P 500® advanced by 1.7%. MRA also pointed out the unusual recent positive correlation between front-month VIX® futures and the S&P 500®, which could give pause to those anticipating a placid last six weeks of the year.

For further historical context, here is a (busy) chart that shows the VIX® Index each year between November 1 and December 31 (excluding 2008, for scale purposes). During the tail end of 2000 and 2018, the Cboe Volatility Index® saw the most meaningful increase (again, excluding 2008). The current Index (light blue truncated line) shows that there have been only two instances where the VIX® Index began November with a lower reading: in 2006 and 2017. 

Inside Volatility Trading 11-12 4
Source: Bloomberg

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A special and sincere thank-you to all the men and women who have served in the U.S. Armed Forces. 



Notable Trades 11-12

Video — VIX Futures Roll Market


Cboe Will Be Attending:
November 14, Markets Group Texas Institutional Forum in Austin, TX
November 16, FOW Dubai in Dubai, UAE

For questions or to provide feedback on the newsletter, please email Alexa Auerbach, Director of Product Marketing, at [email protected] 

To learn more about the VIX Index, visit www.cboe.com/vix.