Over the weekend I was asked to take a look at the first five months of 2015 with respect to the volatility markets. Since volatility indexes need to be looked at in relation to recent history I decided to compare VIX in the first five months of 2015 to VIX last year. Before getting to that comparison, keep in mind the stock market action in early 2014 was very similar to that during the first five months of this year. In 2014 the S&P 500 was up 4.07% while this year the S&P 500 was 2.36% higher as of the end of May. Also there was a similar number of market pullbacks. In the first five months of 2014 there were 21 trading days where the S&P 500 was down 0.5% or more, while this year there have been 22 trading days where the S&P 500 lost 0.5% or more. The big difference in 2015 has been in volatility space.
As of the end of May the average for VIX this year was 15.30, while in 2014 the average at this point was 14.22. There are more volatility indexes that consistently measure implied volatility as indicated by S&P 500 index option pricing and all have been higher in 2015. VXST (9-day volatility) averaged 13.68 for the first five months last year and averaged 14.28 this year. Farther out on the curve the differences are even more dramatic with VXV (3-month volatility) averaging 17.30 this year versus 15.45 through five months last year and VXMT (6-month volatility) averaging 18.91 versus 16.80 in 2014. The term structure chart below compares the averages for each year.
Despite a relatively quiet start to 2015 the volatility indexes depicted above are showing some real concern about the direction of the equity market. With only minor sell offs so far this year VIX is averaging over a point higher in 2015 than the average last year. However, the bigger issue may be the relative levels of VXV and VXMT. The wide spreads when this year is compared to last year indicates increased demand for longer dated options (specifically puts) which usually corresponds with increased concern about the direction of the stock market.