Condor Options

Not very. The relevant refrains here are:

1. Absolute VIX numbers don’t communicate much of anything, especially since the VIX is nearly impervious to technical analysis. In another time, another era – namely, 2008 – a VIX at 30 was widely viewed as a sign of panic and capitulation, i.e. as a signal that equities may be due for a bounce. Today, that same 30 handle is being touted by some as a sign, not of panic, but of confidence gradually returning.  Neither interpretation is particularly sensible if based solely on the quoted value of the index.
2. Spot VIX relative to longer-dated implied levels – like VIX futures, VXV, and the new ETFs – can be meaningful, but really only when the ratio of short and long term levels reaches an extreme, and even then usually only for a quick trade.
3. It’s always helpful to know how tomorrow’s implied volatility stacks up against today’s realized volatility. A 30 VIX is a cause for concern if the prior 30-day realized volatility was in the neighborhood of 15, but not if realized and implied vol are at about the same level.

We follow all of these relationships in our weekly Volatility Tracker, and one way we try to make sense of the VIX is to relate its level 30 days ago (or 21 trading days, to be exact) to the 30 day realized volatility we can observe today.  As indicated in the chart below, the 30-day annualized realized volatility of the S&P 500 is at about 26%. Had you been a net seller of implied volatility 30 days ago (which is something we teach in our iron condor newsletter), you would have pocketed the spread between realized and implied volatility over that period – illustrated by the dotted lagged VIX line ticking consistently above the red 30-day line. Moreover, with realized volatility at 26.64 as of this post, a spot VIX of 28.80 manages to look slightly dear.

Of course, economic or political developments could inject more volatility into market action at any time. But given what we know today, there seems little reason to regard implied volatility as a compelling buy.

For more on this topic, see the following excellent posts:

• Steven Sears, Don’t Get Euphoric About a Falling VIX (Barron’s)
• Bill Luby, Where Will the VIX Bottom? (VIX and More)
• Adam Warner, The Wonderful World of VIX Illusion? (Daily Options Report)