Volatility Drops as S&P500 Stays near Resistance
S&P500 Index Near Highs
On Tuesday the S&P500 index (SPX) got above the spring high on intraday basis (new intraday high 1426.68), but failed to close above. The index stays very close to the highs and volatility is low.
Historical Volatility and VIX
21-day historical volatility has dropped to 10.91% (annualized) at Friday close. At the same time, the VIX (CBOE Volatility Index) has increased off its last Friday long-term low (13.45) and closed the week at 15.18.
The difference between VIX and 21-day historical volatility had been close to zero for most of August, but it has picked up this week, ending at 4.27 at Friday close (VIX 15.18, HV 10.91).
Note that VIX measures market’s expectations regarding volatility realized in the next 30 calendar days (implied volatility of S&P500 options), while 21-day historical volatility measures the volatility that has been actually realized in the last 21 trading days (approximately equal to 30 calendar days in the long term). Therefore, with the difference between the two, we are actually comparing the expectations regarding the future (VIX) with the past (HV).
On historical data we can also compare the VIX with the volatility that has been actually realized in the subsequent period. In this case we are comparing the expectations (VIX) with the reality (realized volatility) on the same time period. The disadvantage is that we only have the realized volatility data after the period has ended.
VIX Futures Curve Steepened Slightly
August VIX futures expired this week and September is the new front month. The futures curve steepened a bit, with the last three months of 2012 adding up to 1 point and the long end adding 1 – 1.3 points.