Tuesday, March 29, 2011

What Happens the Week After the VIX Drops 20%?

I had computer issues Sunday night so I couldn't get this out there when I wanted to. The VIX already went up 8.54% Monday, taking some of the punch away from this post. But here it is anyway...

The VIX dropped 26.7% for the week ended 3/25/11. According to my records, the VIX has suffered a 20% weekly drop only 25 other times since 1990. Here is the performance of the VIX one week later, including the highest intra-week gain (MFE) and loss (MAE). The test (theoretically) buys the VIX on the last day of the week (i.e. 3/25/11) and sells five trading days later.



Ticker
Trade
Date
Price
Ex. date
Ex. Price
% chg
MAE
MFE
$VIX
Long
5/4/1990
        17.28
5/11/1990
        19.81
14.64%
0.00%
14.64%
$VIX
Long
11/16/1990
        21.34
11/26/1990
        22.76
6.65%
-5.86%
6.65%
$VIX
Long
1/18/1991
        25.39
1/25/1991
        22.20
-12.56%
-12.56%
0.00%
$VIX
Long
3/15/1991
        14.90
3/22/1991
        16.49
10.67%
0.00%
13.15%
$VIX
Long
12/16/1994
        12.79
12/23/1994
        11.82
-7.58%
-7.58%
6.88%
$VIX
Long
3/15/1996
        16.54
3/22/1996
        17.05
3.08%
-9.43%
17.59%
$VIX
Long
11/21/1997
        26.65
12/2/1997
        25.66
-3.71%
-3.71%
13.77%
$VIX
Long
1/16/1998
        21.65
1/26/1998
        23.97
10.72%
-5.08%
12.75%
$VIX
Long
11/20/1998
        22.47
11/30/1998
        26.01
15.75%
-5.47%
15.75%
$VIX
Long
10/22/1999
        21.64
10/29/1999
        22.20
2.59%
-4.67%
17.28%
$VIX
Long
3/3/2000
        19.21
3/10/2000
        21.24
10.57%
-0.10%
31.18%
$VIX
Long
4/20/2000
        25.85
4/28/2000
        26.20
1.35%
-2.51%
14.12%
$VIX
Long
9/28/2001
        31.93
10/5/2001
        33.39
4.57%
-5.07%
6.73%
$VIX
Long
5/17/2002
        17.70
5/24/2002
        18.90
6.78%
0.00%
17.01%
$VIX
Long
3/9/2007
        14.09
3/16/2007
        16.79
19.16%
-2.98%
50.82%
$VIX
Long
3/23/2007
        12.95
3/30/2007
        14.64
13.05%
-3.78%
23.94%
$VIX
Long
8/24/2007
        20.72
8/31/2007
        23.38
12.84%
-1.35%
28.23%
$VIX
Long
9/21/2007
        19.00
9/28/2007
        18.00
-5.26%
-10.79%
7.68%
$VIX
Long
12/21/2007
        18.47
12/31/2007
        22.50
21.82%
-1.03%
21.82%
$VIX
Long
10/31/2008
        59.89
11/7/2008
        56.10
-6.33%
-26.11%
9.95%
$VIX
Long
11/28/2008
        55.28
12/5/2008
        59.93
8.41%
-8.65%
24.10%
$VIX
Long
11/6/2009
        24.19
11/13/2009
        23.36
-3.43%
-10.67%
8.19%
$VIX
Long
5/14/2010
        31.24
5/21/2010
        40.10
28.36%
-10.08%
52.56%
$VIX
Long
5/28/2010
        32.07
6/7/2010
        36.57
14.03%
-9.20%
14.03%
$VIX
Long
2/4/2011
        15.93
2/11/2011
        15.69
-1.51%
-6.72%
7.16%


I think you all can see where this is headed: up.

The average move one week after it drops 20% is +6.59%.  The average of the right column is 17.44%. This tells me that before the week ends, there could be a continued spike in volatility, maybe another 8 - 9%.  But even if it does continue to rise, that doesn't means it will end the week positive.  Look at November 1997: it ended the week down 3.12%, but was up 13.77% at one point during that week.

Just some volatility food for thought, even if it's a day late.

Good trading out there.