Volatile Volatility Around 2013 Start

The Fiscal Cliff Roller Coaster on S&P500 and VIX

After the last two months it would be hard to find an investor who does not know what “fiscal cliff” means. The concern that a deal would not be reached before year end gradually pushed equities down and implied volatility up during the last two weeks of 2012, including the normally peaceful days around holidays.

Eventually the politicians agreed on something that was good enough to return the markets to where they started from, although everybody, including the deal’s authors, knows that it is a quick fix rather than a viable long-term solution.

Anyway, the fiscal cliff story will forever remain imprinted in the charts of global markets, most notably on the VIX (CBOE Volatility Index), which on 31 Dec and 2 Jan had the greatest two-day percentage drop in its history (-35.4% from 22.72 to 14.68).

S&P500 in 4Q 2012 (daily bars) VIX in 4Q 2012 (daily bars)

S&P500 and VIX 2012 Charts

Just to recap, this is what S&P500 and VIX were doing in the year that has just ended:

S&P500 in 2012 (daily bars) VIX in 2012 (daily bars)

It took the VIX only 2 trading days to get from 6-month highs near the 2012 lows.

Recent VIX Action in the (Very) Long-Term Context

VIX since 1990 (weekly bars):

VIX since 1990 (weekly bars)

In the 14’s we are now near the long-term lows since 2007. This does not mean that the VIX must automatically go higher from here. As you can see it spent plenty of time near (and even briefly below) 10 in the past. However, it always got there through a slowly declining channel rather than a sharp drop (unlike the upside moves which can be very fast). The odds and especially the risk/reward (taking the size of potential moves into consideration) favour a long volatility position rather than short at this moment.

Of course, holding a long VIX position over a longer time period comes at a (substantial) cost. For example, as you can see below, the nearest futures (expiring in two weeks) are currently trading just below 16, with some upside potential priced in already.

VIX Futures Curve Around Year End


The curve briefly got to really high level and had an U-shape at the peak of the fiscal cliff fear at Friday 28 Dec close. Spot VIX went from below 21 to above 23 just in the last hour of trading on that day. After the two days of record fall in the VIX, the curve is now almost unchaged from 18 December (the low before VIX started to climb into the year end).

So here we are now, wondering what the next story will be and where it will take us (and the markets) in the first weeks of 2013. Happy new year everyone.