Wednesday, December 24, 2008

The Volatility of the VIX: From Bear Panic to Barely Elevated

VIX, a measure of implied volatility for S&P 500 options, has been making multi-month lows this past week, declining even as stocks have moved lower. Equally interesting, the volatility of the VIX itself--measured in the chart above as a five-day moving average of high-low percentage range--has returned to average values characteristic since 2007.

The volatility of the VIX is interesting in that it measures relative uncertainty in options pricing. During the October plunge, we saw record uncertainty, which has been declining ever since. Note how, in general, we tend to see relative uncertainty in VIX volatility near intermediate-term market lows and relative certainty near peaks. More than 40% below the 2007 peak in the S&P 500 Index, we're now seeing surprising unanimity and comfort in option pricing, even as the market has declined. In the past, that has not been a bullish indication.