Thanksgiving. It’s time for turkey, yams, and pumpkin pie! But Thanksgiving is about much more than the food we eat. It’s a time to give thanks for the opportunities we have, our freedoms, and to the people around us that help in the good times and bad. In the context of volatility (which is what this weekly update has strived to be all about), we can give thanks to the CBOE Volatility Index (VIX) and other barometers that can help us make sense of the daily ups and downs of the sometimes-chaotic financial markets.
VIX, for its part, has moved sharply lower since the US elections. The market’s so-called “fear gauge” had rallied to its highest levels since late-June in the week prior to the voting, but fell quickly back into the mid-teens as the event moved into the history books. As we can see in figure 1, at 13.5 late last week, VIX was a far cry from the multi-month high of 23.01 on November 4th.
VIX tracks the expected or implied volatility priced into a strip of S&P 500 Index (SPX) options and typically moves lower when the S&P 500 heads higher. It can also spike during times of high anxiety or when the stock market suffers sizable losses. For that reason, not only does VIX give a sense of how volatility is changing from one day to the next, it can be viewed as a barometer for investor sentiment.
Historical volatility (HV) gives perhaps a better sense of the actual volatility of an instrument because it considers only closing prices. Also known as realized or statistical volatility, HV is the annualized standard deviation of closing prices over a period of days such as 30, 90 or 120.
Figure 2 shows the 20-day HV of the S&P 500. Notice that, unlike VIX, it did not run higher prior to the elections. Instead, the indicator didn’t start moving higher until November 4th and, even now at 10.6, it is certainly not elevated compared to VIX at 13.5. (Please see last week’s update for a look at the extreme divergence between HV and VIX before the elections).
Lastly, we can be thankful that the Chicago Board Options Exchange has created several other VIX-like indexes to view implied volatility of options across different asset classes. For instance, the OVX Index tracks oil volatility and is up 3% in 2016. Volatility of the Euro currency, as measured by EVZ, has jumped 22.7%, but volatility of emerging markets (VXEEM) is down 2.5%.
|S&P 500 Volatility||VIX||-25.8%|
|NASDAQ 100 Volatility||VXN||-15.1%|
|Russell Small Cap Volatility||RVX||-7.2%|
|Emerging Markets Volatility||VXEEM||-2.6%|
|Euro Currency Volatility||EVZ||22.7%|
|Treasury Bond Volatility ||TYVIX||17.5%|
Data source: CBOE. Data through 11-17-2016. For illustrative purposes only. Past performance does not guarantee future results.
Whether or not you trade options, volatility indexes may help you feel the pulse of the markets and better understand how volatility changes from one day to the next. Historical volatility can be computed for any instrument with a sufficient trade history, as it is a measure of closing prices. Meanwhile, CBOE Volatility Index and other VIX-like indexes offer insight, about not only volatility, but also investor sentiment.