The CBOE Market Volatility Index (VIX) cracked below 20% volatility last week, although the decline to below this psychological measure may be due more to the mechanics of how the VIX is calculated rather than an actual reduction in the market’s concern about future stock movement.
The VIX cash index attempts to calculate the 30-day implied volatility of the options on the S&P 500 Index (SPX). Last Tuesday, this fear measure dropped below the 20% mark for the first time since August of 2008. On this date, 30 calendar days amount to just 18-1/2 trading days because of the half-day session on Christmas Eve plus the Christmas Day, New Year’s and the MLK holidays.
Normally, 30 calendar days include 22 trading sessions (taking out only weekends). Basically, there are just 85% (18.5 versus 22) of the typical trading days during the next month, likely meaning that the option premium has already been decayed or discounted for a portion of the days that the market will be closed. This pre-decay often occurs in a trading week leading up to three-day holiday weekend such as Presidents’ Day. As the individual holidays pass and the VIX calendar becomes more normal, we will get a true reading on the risk appetite of investors. Don’t be shocked if the VIX spikes back above 20% without the market selling off.
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Tags: implied volatility, VIX
