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Tricky VIXy

The VIX index is back to its old tricks and pointing its head up again above the 20 mark for two days running.

Again, for those who haven’t been following, the VIX is a measure of the implied volatility over the S&P500 benchmark. Now there is also a VIX curve, which, as alluded to earlier in my previous posts (see: Update on the coming year, Chart of the Month: VIX, VIX Breakout, and the Contango Price Back), already proved quite a page turner over the course of the past few months.

Volatile Vega

In essence, the story on all vol’ traders lips last year was a steepening VIX contango and what it might possibly mean. Externally, it seems that VIX was pricing itself further out on the curve, which is good in a way, but worrying in another.

Volatility has a tendency to both be volatile itself and also to clump its variance together (see: heteroskedasticity). In other words, pushing volatility out further along the curve potentially implied greater implicit worries…

Smirking Smiles

There is some talk, anecdotal at the moment, over the implied volatility curves occurring over VIX options chains themselves with some potential skewing across that smile into a more directional smirk.

This is potentially of greater import for the vega suppliers out there rather than a strong signal to the core underlying benchmark fundamentals just yet. At the moment, broadly speaking, we are still within reasonable parameters (see distribution chart below).

Where Are We Now?

Well, current news flow is shaking markets a little right now: political risk is back on the map and oil, at least over Brent side, is pushing the $120 mark.

This gave a bit of a hit to the good’ol VIX curve with another push-up over the 20 mark. Also, it would seem that the general declining trend might be reviewed a bit on the upside with the MA100 being breached for two consecutive days. This isn’t much to worry about per se but it does indicate a reinforcement of some sentiment out there.

VIX index on 23 Feb. 2011

The VIX index breaks out above the Upper Bollinger and the MA100 for two consecutive trading days.

As the following distribution graph shows, VIX is not yet in the danger zone of the upper 26 and rising range. This could still occur over the course of this quarter; however, as mentioned in previous posts, the economic fundamentals remain broadly positive.

VIX_Distribution_23022011

VIX Distribution Graph 1990 to 2010. VIX Index position for 23 Feb. 2011 is overlaid. All data courtesy of CBOE.

Volatility Hunters

There’s still plenty of vol’ out there to play with for those hungry for that kind of stuff. Indeed, the recent M&A talks in the market have helped in skewering the curves upon good heated economic embers.

It is worth remembering, especially in relation to VIX, that M&A activity is quite often a strong fundamental sign of economic buoyancy. Well, here’s to remaining cautiously positive 🙂

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