Looking Longer Term VIX

• Posted by Adam Warner
• on December 2nd, 2009

Spent a lot of ink noting that options volatility in general has consistently overpriced realized stock volatility. And likewise, it’s difficult and potentially expensive to call turns in volatility. But perhaps we’re near the lows.

Jim Strugger of MKM Partners takes a look at the longer term macro cycles in the VIX. We’re talking really long term. The VIX didn’t exist until 1990, but they backdate some calculations for you so you can go back to 1986 and see where it would have been. Of course I can’t chart it, as this only goes back to 1993. And it uses VXO since that was the VIX back then.

By this analysis, the VIX has roughly 4 full cycles, “up” one’s in the late 80′s and late 90′s and down one’s in the early 90′s and early 00′s. We’re currently in cycle 5. It stated in 2007, and if it’s an average length it will go until 2012.

What does that mean?

Well, the VIX should hover roughtly between 20 and 40. And since we’re close to the lower end of that range, it suggests we don’t have much more room on the downside in options.

Now that doesn’t mean you go buy everything at these volatility levels. Remember, for long options to “work” you generally need realized volatiity to outperform the implied volatility you paid. MKM suggests it’s a decent time for directional bets via options, but for longer time horizons. Waiting for day-to-day moves to pick up speed can drive you nuts, but over 4-8 month’s you can wait out a net move.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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