VIX Skew - Market Collapse Impending?

L

livevol_ophir

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The VIX is ~24.72 on today.

There has been some talk recently about the VIX options skew and how it indicates a possible severe market downturn. The rationale is how the skew looks today relative to early September 2009 (before that market collapse). The Skew for today (2-12-2010) and 9-9-08 are included in the article. Note the level of the VIX highlighted in yellow and the dates on the charts.

The Charts Tab snapshot of the VIX (2 years) is included in the article. Not that we needed a reminder, but the VIX exploded above 80.

So the talk recently (from some) has been that the similar skew today represents a risk of similar explosion in the VIX (an implosion in the market). Fair enough. But how about a different angle?

I have included the Skew chart of the VIX from 7-7-2009 in the article. Note the similar shape to 9-9-2008.

The Charts Tab snapshot for that time shows of course that the VIX traded in a tight horizontal range after that skew - certainly no explosion. The chart is included in the article.

So, a skew as we see today isn't necessarily a guarantee of the future (good or bad). For completeness I have provided the skew charts from 10-27-09 (right at the height of insanity) and from 3-5-2009 (the market bottom). Note how much flatter the front month is relative to the prior snapshots.

Details, skews, charts, prices in article:
http://livevol.blogspot.com/2010/02/vix.html
 
Quote from livevol_ophir:

The VIX is ~24.72 on today.

There has been some talk recently about the VIX options skew and how it indicates a possible severe market downturn. The rationale is how the skew looks today relative to early September 2009 (before that market collapse). The Skew for today (2-12-2010) and 9-9-08 are included in the article. Note the level of the VIX highlighted in yellow and the dates on the charts.

The Charts Tab snapshot of the VIX (2 years) is included in the article. Not that we needed a reminder, but the VIX exploded above 80.

So the talk recently (from some) has been that the similar skew today represents a risk of similar explosion in the VIX (an implosion in the market). Fair enough. But how about a different angle?

I have included the Skew chart of the VIX from 7-7-2009 in the article. Note the similar shape to 9-9-2008.

The Charts Tab snapshot for that time shows of course that the VIX traded in a tight horizontal range after that skew - certainly no explosion. The chart is included in the article.

So, a skew as we see today isn't necessarily a guarantee of the future (good or bad). For completeness I have provided the skew charts from 10-27-09 (right at the height of insanity) and from 3-5-2009 (the market bottom). Note how much flatter the front month is relative to the prior snapshots.

Details, skews, charts, prices in article:
http://livevol.blogspot.com/2010/02/vix.html
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Thanks for posting. That is the best post I have seen from a sponsor in a while
 
Quote from dandxg:

Thanks for posting. That is the best post I have seen from a sponsor in a while
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thanks... I hope that doesn't mean you haven't liked my other posts... lol
 
Quote from livevol_ophir:

thanks... I hope that doesn't mean you haven't liked my other posts... lol
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I didn't even know you existed before this post. :)
 
The two examples you show make it look tempting, however, is there any way you could maybe plot out the historical IV % skew spread on the front month over all of the historical periods between the dates? I think that would make a much stronger argument for the case you are making whether unusual spreads are shown to be significantly correlated to drops over some horizon. If the relationship is truly significant, you could even use it as an indicator in charting packages.

It sounds like you have a lot of experience in seeing this emperically, but I think such a plot would be a very useful addition to your blog commentary. Also a correlation scatterplot between the spread and change some n days out would also make a very nice addition.

2c
 
Quote from dtrader98:

The two examples you show make it look tempting, however, is there any way you could maybe plot out the historical IV % skew spread on the front month over all of the historical periods between the dates? I think that would make a much stronger argument for the case you are making whether unusual spreads are shown to be significantly correlated to drops over some horizon. If the relationship is truly significant, you could even use it as an indicator in charting packages.

It sounds like you have a lot of experience in seeing this emperically, but I think such a plot would be a very useful addition to your blog commentary. Also a correlation scatterplot between the spread and change some n days out would also make a very nice addition.

2c
More...

Ask and you shall receive: http://livevol.blogspot.com/2010/02/vix.html

Look at the end of the article - but don't forget to REFRESH your browser.
 
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