Is the VIX heading to 30?
Every day at least one of my option mentoirng students ask me where I think the VIX is going. The answer of course is I do not know. "If I knew that, I wouldn't be talking to you, I would be on my Island!" is my typical response. That said from time to time there are some things that make think either the VIX is going higher, or the VIX is going lower. Today, I want to talk about one of the things I look at: relative volatility levels.
Today, I was looking at the last time the SPX I wanted to know, where was its implied volatility the last time it was trading 1320, on the way UP, and the last time it was trading 1320 on the way down. These can be seen on the chart below from LiveVolPro.
I drew a yellow line to point out something. Not only was IV is much higher than it has been the last two times we closed near 1320. On the way UP we might expect that. Typically, as the market is rallying IV is dropping, espcially if it is a robust rally as this last one was. The issue I have is with the previous 1320, when the market is in decline.
One thing Bill Luby (my friend and co-editor at Expirng Monthly (did you get your free issue yet btw)) and I pay attention to is when, relative to price in the SPX, the VIX is hitting higher highs and higher lows. This can be a signal that the market is in a cycle of increasing fear on every SPX downturn. If we look at the last time SPX hit 1320 on a downturn, we can clearly see how much higher IV is now than it was then. This is a bit of a scary sign to me.
Essentially, I do not know if the VIX will get to thirty. But, If the SPX gets down to 1260 or so, you can bet your life we will break 25 this time around. We are in a trend of higher IV’s. Thus, I am going to hold off on any type of premium sale until I see a VIX above 23.
