Realized Volatility Much Lower than VIX in January 2013 (So Far)

Summary

Do not get fooled by historical volatility in the teens if you are using a longer term window for its calculation. It is inflated by the December fiscal cliff volatility spike. January realized volatility (when using a shorter historical volatility period) has been well below 10% so far, which is of course well below the VIX.

S&P500 Bullish and VIX at Multi-Year Low

The picture of US (and global) equity markets and volatility has remained the same. In fact, the last 5 trading days (ending Thursday 17 January) were overall even less volatile than the 5 trading days before:

S&P500 in January 2013

After a few sideways days and some upward pressure on the 1470 resistance the S&P500 broke out to new high yesterday.

VIX in January 2013

The VIX (CBOE Volatility Index) has stayed in the 13’s for 7 consecutive days, even intraday. The range of VIX closing values in the last 10 trading days has been only 0.47 (13.36-13.83).

Many people (myself included) had thought the VIX would not stay in the 13’s for very long. Many people are still expecting the VIX to go up soon. One obvious reason is that the VIX is now at more than 5 year lows and it tends to revent to the mean.

Furthermore, although the VIX is at a premium to realized volatility in the long run, the current VIX of 13-14 is in line with recent realized volatility. So it would seem, but is it really?

Historical Volatility

Below you can see 21-day historical volatility of S&P500 in the last two years. At 17 January close it was 13.57%, in line with VIX of 13.57 (exactly, but that’s not important).

S&P500 21-day historical volatility

However, we all remember what happened before we got into this low volatility January action – the fiscal cliff down and up ride on S&P500, corresponding with up and down ride on the VIX. Realized volatility was of course also inflated due to this and therefore the current reading of 13.57% does not reflect January well.

If we look at 11-day historical volatility (the chart below), using all close-to-close changes so far in 2013 but nothing from December, we get a completely different realized volatility figure: 5.77%. Less than half of current VIX values. Also notice (on the chart above) that sub-10% realized volatility was common at year start in both 2011 and 2012.

S&P500 11-day historical volatility

Conclusions

Yes, the VIX is at multi-year low and it will go higher sooner or later (and there are many possible catalysts that come to mind).

However, realized volatility is not among the reasons why anyone should think that the VIX will go up soon. It has been well below 10% for all of January 2013 so far, which is also in line with the patterns of the previous years.

VIX Futures Curve

The post would not be complete without an update on the VIX futures curve. January VIX expired on Wednesday and settled at 13.69, the lowest since June 2007. The curve remains steep (especially February and March), which also means that holding long VIX positions remains expensive (although it can still get very rewarding if you get the timing right). May or June at or below 19 can look attractive for a longer term volatility bet.

VIX futures curve