What a Consistency in VIX Highs (and Lows)

Friday, 4 October 2013

Yesterday the VIX index closed at 17.67, highest since the end of June. This is the 5th major VIX spike YTD. 4 out of the 5 spikes (June being the exception) have had intraday highs within 1.5 VIX points range (17.80 – 19.27) and closing highs within 2 VIX points range (17.01 – 18.99).

VIX (YTD, daily bars)

In the big June VIX spike you can actually identify three “subspikes” and the first two of them also had their intraday and closing highs within this range, like if there was a resistance in the VIX at these levels. The VIX only broke out of the range 1-2 weeks later and only stayed there for 3 sessions before sharply falling to 12 in July.

Major YTD VIX Highs

You can also find a similar zone at the bottom of 2013 VIX range. It is much narrower (which makes complete sense) and it has also been violated on one occasion in March.

VIX (YTD, daily bars)

These thoughts of course have little meaning for predicting the future. They just came to my mind when I saw the VIX chart. It is certainly possible that today or the next week the VIX will break out to new highs.

Nevertheless, so far in 2013 a winning strategy would have been to go long volatility when VIX reaches the lower zone and short volatility when it reaches the upper zone. While it sometimes stayed in the 12’s or 13’s for longer time (and staying long VIX of course costs money with passing time, especially when it’s in the 12’s), shorting the spikes would have brought you fast profits (but keep in mind that buying VIX puts is much safer than shorting VIX futures). Alternatively, VIX spikes would have been good signals for going long stocks.

Rather than observing these exact zones, which will certainly become invalid sooner or later, treat the chart as a reminder that volatility and the VIX are mean reverting and it does generally pay to fade extremes.