The Options Insider - Your Inside Source for Options Information

When VIX and VXV Get Out of Whack

When VIX and VXV Get Out of Whack

Everyone seems to be watching the VIX these days, but there’s another market indicator I like to watch: the VIX/VXV ratio.

The VIX, is of course, the CBOE Volatility Index. This measures the implied volatility of S&P 500 options expiring in about one month. For more on this, see my previous post: “Does the VIX Get it Right?”

But its sister indicator, the CBOE S&P 500 3-Month Volatility Index (VXV) measures the implied volatility of the same options expiring in three months.

So do traders expect more volatility in the longer term than they do in the short term? The one-month volatility (VIX) is almost always lower than the (three-month volatility (VXV), but sometimes it soars higher.

What happens when traders expect more volatility sooner rather than later?
Here’s a weekly chart showing the S&P 500. At the bottom you can see the VIX and the VXV indexes. The purple line in the middle shows the VIX/VXV ratio.



When the purple line is above 1.0, that means more volatility is expected sooner rather than later. It’s not always the harbinger of doom, but that last move above 1.0, in May of this year, was the highest since 2008.

That move seems kind of alarming. It appears to reflect changing market psychology when traders are willing to pay more for short-term protection vs. long-term protection using options.

Here’s a daily chart going back a few months:



And this is a 30-minute chart showing about two weeks of price movement. Note how the ratio stepping down is associated with a more benign market (unless you’re short, of course).



I’m not sure whether this indicator offers any potential for technical trading or not, but I do know I like to keep my eye on it. What do you think – does the difference between 30-day and 90-day volatility matter?