1H2012 Ends with VIX Lower than June Realized Volatility

SPX

June has turned out to be an interesting (= volatile) month. It started with the greatest 2012 day-to-day decline in the S&P500 (-2.46% on 1 June) and yesterday it ended with the greatest 2012 day-to-day increase (+2.49% on 29 June). Number 2 on both sides also happened in June: the second greatest decline so far in 2012 was -2.23% on 21 June, while the second greatest increase was +2.30% on 6 June. There haven’t been any other day-to-day changes greater than 2% to either side in 2012 so far.

Overall, the S&P500 index added 3.96% in June (since 31 May close), and 6.58% since the lowest close on 1 June.

S&P500 in 1H2012

To many of us, the volatility in the first half of 2012 has been surprisingly low, given the numerous fundamental uncertainties in various regions of the world and the extent to which they are being talked about. To add a bit more statistics:

  • In 1H2012 there were only 16 days with a day-to-day increase in S&P500 greater than +1%. 5 of these days were in June.
  • There were only 13 days with a day-to-day decline greater than -1%. 4 of them were in June.

Historical Volatility and VIX

Historical volatility picked up markedly in June. 21-day HV (the pink line on the S&P500 chart above) ended just above 20, while it had stayed below 15 (and sometimes much lower) until May.

However, the VIX (CBOE Volatility Index) recorded the greatest monthly decline since October 2011 in June, losing almost 7 points (from 24.06 to 17.08) – and the monthly decline would have been even greater if measured from 1 June, the highest VIX close in 1H2012 at 26.66.

VIX in 1H2012

Friday’s VIX close of 17.08 was the lowest since 2 May. Spot VIX, which measures implied volatility of S&P500 index options expiring 30 days from now, is now 3 points lower than last month’s realized volatility. Obvious factors that have contributed to this situation are:

  • The overall positive performance of S&P500 in June (the volatility was higher, but the direction was mostly to the upside).
  • The high volatility in June was way above the volatility seen in the other months of 1H2012 (so June might have been an outlier).
  • Seasonality (beginning of summer).

VIX Futures Curve

VIX futures curve

VIX futures curve has steepened in June, which is not surprising given the move in spot VIX. What is more interesting is that the long end of the curve moved significantly lower too. The market is now expecting much lower volatility in the last months of 2012 than it had expected at the beginning of June (October and November VIX futures fell from about 30 to about 25).