What the VIX can tell you about today’s market action
How much opportunity is in the stock index
market?
In my recent research, I
took a look at 40-day
segments of the S&P 500 Index market going back to 1990 and found that there was
a dramatic difference in the size of the market’s expectable movement as a
function of the current day’s VIX, its options volatility reading. When the VIX
was high, the median move size in SPX over 40 days was three times as great as
when the VIX was low.
This appears to be the case for daily data as well. How much potential
opportunity in the market there is–its total amount of offered
movement–correlates quite well with the volatility priced into the index
options.
Going back to 1990 (N = 4204 trading days), we have 287 occasions in which the
daily VIX was greater than 30. The median daily high-low range on those
occasions was 2.275%, and the median size of the daily move (from yesterday’s
close to today’s close) was 1.21%.
When VIX was between 25 and 29.99 (N = 432), the median range (daily change) was
1.75% (.95%). A VIX between 20 and 24.99 (N = 940) gave us 1.32% (.67%), whereas
a VIX between 15 and 19.99 (N = 1225) provided .97% (.49%). That tells us that a
VIX between 15 and 20 has given us about half the movement of a market with a
VIX above 25.
What happens when VIX drops below 15, as is the case at present?
When VIX has been between 12.5 and 14.99 (N = 729), the median range (daily
change) has been .74% (.34%). Those numbers drop to .63% (.31%) when the VIX is
below 12.5 (N = 591). In all, there is nearly four times as much movement in a
high VIX market as a low one. A market such as we had in June, in which VIX rose
above 20, has twice the movement of the present market.
Bottom line? Not all movement is opportunity, but
you can’t have opportunity without movement. Since June, opportunity has
been cut in half for daytraders of the S&P market. Imagine if basketball
players one season found the rims set for a height of 10 feet, then 12 feet the
next season and 9 the one after that. Suppose the pitching mound in June was 59
feet from home plate, but 40 in August.
That is the challenge of being an equity index daytrader.
Brett N. Steenbarger, Ph.D. is Associate Clinical
Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical
University in Syracuse, NY and author of
The Psychology of Trading (Wiley, 2003). As Director of Trader
Development for Kingstree Trading, LLC in Chicago, he has mentored numerous
professional traders and coordinated a training program for traders. An active
trader of the stock indexes, Brett utilizes statistically-based pattern
recognition for intraday trading. Brett does not offer commercial services to
traders, but maintains an archive of articles and a trading blog at
www.brettsteenbarger.com and a
blog of market analytics at
www.traderfeed.blogspot.com. His book, Enhancing Trader Performance,
is due for publication this fall (Wiley).