Getting Behind the VIX – a New Look

During  the recent market run up, the VIX  has dropped to new lows of the year (just around 16+).  The VIX is a 30 day forward look at the Implied Volatility of the  S&P 500 Index Options (SPX) and a popular sentiment for market volatility overall (http://www.cboe.com/micro/vix/introduction.aspx) .  My quick and dirty indicator is as follows- Boring Bull Market VIX is 7-13, Internet Bull Market VIX is 13 -20+,  Panic VIX is 30+, Near Financial Collapse VIX is 75+, 1987 Crash VIX is 100+.  Right now we are not really in any of those general categories but the hangover of the Credit Crunch is alive and well (not exactly a Boring Bull) with the market making highs for the year.  Does the VIX look likely to continue moving down?

Let’s look at the  individual components of the S&P 500 with earnings season in full swing.  In AlphaVision, I set up a landscape of the S&P 500 with a ratio of the At-the-Money (ATM) Near Term Implied Volatility/ HV10 (10 Day Historical Volatility) to compare Implied Volatility (of the options) to Historic Volatility (of the stock).  Green buildings have the option volatility trading a premium versus a 10 Day Historical of the individual stocks.  Diagonally moving across the landscape from left to right  the degree of overvalued implied volatilities start to decrease (the landscape gets less green and more red) and the underlying stocks are moving more than the Implied Volatility of the options would suggest . 

From this View, most (70%) of the Near Term Implied Volatility looks overpriced relative to the movement of the underlying stocks in the S&P 500 and probably reflect earnings season.   CPWR, for example,  has an ATM Near Term IV of 56 but only a HV10 of 12.   Any sign of a benign earnings season will make those extra premiums (and the VIX) come down closer to  where stocks are actually trading.  Stocks in the S&P 500 have to move a lot to support the way traders have the options priced right now.

 

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