VIX And The 200 Day

• Posted by Adam Warner
• on July 29th, 2010

I believe VIX charting has some utility if for no other reason than to visualize deviations from short time frame moving averages. Farther out though? I just don’t see it. But anywhere I chart something, I default to first pop up the 20 day, 50 day, and 200 day MA’s. And can’t help buy notice VIX either bouncing off the 200 day twice in past 6 weeks, and then hovering in the vicinity in recent days. Here it is.

Options guru Bernie Schaeffer has this take in his August Options Advisor.

“……the 200-day moving average of the CBOE Volatility Index… has been quite significant over the years. This should be somewhat surprising to many students of market technicals, as moving averages are supposed to be a tool for gaining insight into the price movement of instruments such as equities that routinely display “price trends,” whereby price movement in a particular direction begets more price movement in that direction. But volatility is said to be a “mean reverting” instrument, in which case pronounced price movement in a particular direction is most likely to beget movement in the opposite direction.”

Precisely.

So why are we seeing this? Dr. Schaeffer speculates that as the VIX cheapens to the 200 day, put buyers as well as VIX futures and VIX call buyers emerge. Maybe, but he also notes there’s relatively light futures volume associated with the large premiums.

Which makes me think there’s something more. Or less. It’s entirely possible we’re mistaking a coincidence here for something more. The VIX strikes me as kind of fair right here right now given our current backdrop. There are too many risks in the system to justify selling options down to teens-VIX, and likewise we just don’t see the ranges to justify VIX in the 30′s either. In fact, 10 Day realized volatility sits in the low 20′s, so a VIX in the mid 20′s has a perfectly routine premium.

As to the 200 day MA? Well that sits right here too at 23.38. I really don’t believe VIX is stopping here because any sort of support, rather the 200 day really just sits right now at a very fair VIX level.

The market continues to price in an uptick in volatility for the Fall, though to a lesser extent than in recent days. October VIX futures carry a 6.25 pt. premium as of this writing. Still very high, but down 2 points in the past week. The whole “erosion” is thanks to the futures not moving while VIX itself inches higher.

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