Volatility Predictions

The VIX is a measure of how much the S&P500 (SPX) is expected to jump around.   That is the value of it.  Back in 1993 the Chicago Board Options Exchange (CBOE) started to calculate the volatility of the S&P100 or OEX.  Until 2003 the VIX was based on the OEX.  Since SPX became the most popular options contract, the CBOE started calculating VIX on the SPX instead.  The OEX volatility is still calculated but now it is called the VXO.

Traders like looking at the VIX to get an impression of the mood of the market.  If VIX spikes up, that is taken as a buy signal.  Since a spike in VIX speaks of market fear which is often overdone.

The VIX is calculated as a weighted average of the implied volatility of the nearest two SPX options series.  That is its link to the movement of the index, since the implied volatility is the measure of the expected movement of the index in one year.

Since the crowd is generally better informed than any single individual, it is worth understanding what the market as a whole says that volatility is going to do over time.  Is the going to be a crash in the fall?  Is the summer going to be quiet in the market?

In March 2004 the CBOE Futures Exchange (CFE) created futures contracts on the VIX.  Then two years later the CBOE created options on the spot VIX in the near month, and the later month options trade off the fuutres contracts.

The same information is in the SPY options series, except that it isn’t aggregated over the whole option series the way VIX does.  So if we want to look at the term structure, that is, how the volatility varies through time, we can look at the at the money SPY options too.  It should agree with the VIX futures data.

So if we look at the SPY 92 options what do they predict?  (SPY is at 91.75 right now.)

So we see that the expected volatility is very flat all the way out to March of next year. No crash in the fall is expected. A summer much like this spring.

We’ll see.