Why Does This VIX Seem So Scary

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Why Does This VIX Seem So Scary?

As I look at the VIX trading 16% yesterday, and the market still near 2008 highs, it got me thinking.  What is with all the gloom and doom?  Was everyone acting like the market is about to take a dive?  To start; lets take a look at to volatility charts; one is the IV of the VIX from Jan-Apr in 2011, and the other is the IV of the VIX from Jan to April in 2012.  


Graphs from Livevol (R) www.livevol.com

Before guessing which is which, recall that in 2011 we had the Japan meltdown and the beginning of the European debacle, which caused the VIX itself (remember this is the IV of the options we are looking at).  Would you expect this slow 1st quarter to look like it had the lower numbers or the higher numbers?  The answer is that the 1st image is actually 2012. 

IV of VIX options is sky high.  The market is playing a little fool me once shame on you, fool me twice shame on me with VIX options it appears.  But is that bearish?  Is that a sign that the market is about to tank and the VIX explode?  Not exactly, VIX option IVs is typically high AFTER a move has been made, not before.  In fact, I think VIX high IV might be bullish.

This is a chart of VIX IV from the last 6 months. 


livevol (r) www.livevol.com

Notice that IV is as high now as it was in October.  In both cases, the SPX ended up moving UP not down.  I am starting to look at VIX IV as an indicator in of itself.  Maybe the ëVol of Volí is a good leading indicator in a way that skew can be.

The Trade
What I think high VIX IV represents is a market that insures itself.  This is what is allowing the 'buy the dip' that we keep seeing on any sell off.  In general, until we see skew flatten and VIX IV come IN, not go UP, I think the wind is at this markets back


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