VIX of the VIX

The volatility of the CBOE SPX Volatility Index (VIX) in recent days is especially noteworthy as the measure of implied volatility in the S & P 500 Index (SPX) is once again bouncing near year-to-date lows.

Investors often look to the VIX to try to gauge the next move in the market, or whether the level of implied volatility is a buy or a sell.  The VIX could give misleading signals in both of these regards.

First off, the VIX is an estimation of what the 30-day level of volatility would be if such an instrument existed.  The index is both interpolated between the first two month levels trading in the SPX and then derived from the midpoint of the bid and ask of the individual options. Also, the out-of-the-money options on the put side particularly have the greatest weight on the level of the VIX.  This level has become extremely volatile lately as option traders seemingly are quick to buy out-of-the-money put options in down days and are just as quickly selling out of them with a market rally.

Given the recent movement in this index of volatility, the vol of volatility is so high that it would not surprise me at all to see the index crack below the 20% level at some point before the end of the year - or, for that matter, blow back above the 30% level.  Inputing the VIX into the Probability Calculator on the OptionsHouse platform tools suite shows one standard deviation up and down to December expiration is currently 16.24% to 29.78% using the Historical 30-day volatility, currently 105%.

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Lastly, remember the VIX options are not for everyone and extremely complex.  They trade off of the VIX futures, not the cash.  For more information on the unique settlement of the VIX, check out the OptionsHouse blog.