Macro Wrap – Is the $VIX at 15 Cheap or Expensive?

by Enis August 16, 2013 7:43 am • Commentary

After our first major down day since the local bottom on June 24th, we still find the VIX below 15 (though up from around 12 earlier in the week).  Is that cheap or expensive?

If you focus solely on the short-term, realized volatility in the S&P 500 index has been quite low in the past month, even including yesterday’s drop.  10 day realized volatility has been below 10 the entire time, which is low even by the standards of the past 18 months:

10 day realized volatility in the SPX Index, Courtesy of Bloomberg
10 day realized volatility in the SPX Index, Courtesy of Bloomberg

It has been quite rare to find 10 day realized volatility above 15 for much of that period.  Moreover, we’re currently in the middle of August, with no major earnings or macroeconomic data until the start of September (though, as I argued yesterday, price movement is often the biggest catalyst for further movement, not news or headlines).

More importantly however, and what often gets lost in only focusing on the short-term for the VIX, the underlying swing moves in the S&P 500 have been very large this year.  Check out this chart of the major moves up and down so far this year:

Daily chart of SPX in 2013, Courtesy of Bloomberg
Daily chart of SPX in 2013, Courtesy of Bloomberg

So far in 2013, we’ve had a move higher of about 18.5%, a mover lower of about 7.5%, and then another move higher of about 9.5%.  And that all occurred in only the first 7 months.  Meanwhile, the VIX has remained below 20 for essentially all of 2013.  The only other years in the past 15 years when the VIX had a similar profile to 2013 (with VIX below 20 for most of the time) were 2004, 2005, and 2006.  So how big were the price moves in those years?

  • 2004:  The S&P 500 index started the year at 1112, and ranged between 1060 and 1214, a range of -5% to +9% for the year 
  • 2005:  The index started the year at 1212, and ranged between 1136 and 1276, a range of -6% to +5% for the year
  • 2006:  The index started the year at 1248, and ranged between 1219 and 1432, a range of -2.5% to +14.5%

But those ranges were for the entire year.  Here’s the thing about 2013 – we’ve already had a range of almost 20%, with 4.5 months of trading still to go.

With that in mind, what about the VIX at 15?  While the daily close-to-close realized volatility is a measure that shows depressed volatility, if we look at the magnitude of the year-to-date move in the SPX (almost 300 p0ints from trough to peak), all of a sudden, realized volatility seems quite high.  And maybe, in that sense, the VIX at 15 is indeed too low.

My point is, the measurement matters for your perception of volatility.  Options prices look too cheap to me because this market has shown that it is capable of moving not only 20% in 6 months, but also 7.5% in one month on two occasions just this summer.

Meanwhile, the at-the-money November straddle in the S&P 500 is priced at around 93 points as of yesterday’s close, or around 6% of current spot.  At 14.5 implied volatility, it might look expensive based on the 10 day realized volatility chart I showed at the start.  But measure volatility on a quarterly time frame, and all of a sudden, it might be quite cheap.



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