VIX Rally Screams for a Yawn

We have certainly had a lot of news in the one-plus days of trading this week, but not an enormous degree of price action. S&P Index Options (CBOE: SPX) had a range under 1% yesterday, albeit in the “up and back” variety. And net-net its down about 3 points total.

Yet VIX has lifted about $1.40, or almost 10%, since Friday’s close.

I generally preach that we should pay most attention to the CBOE Volatility Index (CBOE:VIX) when it does something we don’t expect. Well, if you told me we have huge news behind us and an indifferent market, I would anticipate an unch-to-down VIX, nothing close to a 10% rally. So in theory, VIX should tell us something here. But upon closer inspection, it�s probably telling us � not much.

For one thing, we have bounced off extremely low levels. VIX hit multi-year lows these past two weeks, and in a rather odd time of year. We usually see some demand for options in spring around earnings season before we ultimately dip for the traditional summer blahs. We need to put the impressive VIX rally into the context of its absolute levels. So while a 10% lift screams out for analysis, a full of 16 screams out for a big yawn. A 16 VIX implies the two-thirds of trading days will see moves under 1% in SPX. And we struggle to even see that nowadays.

For another, the “market” already priced in a quick VIX lift off the lows. May VIX futures carried premiums over $2 to VIX last week, and even now they trade with a $1 premium. That suggests that the Wisdom of the Crowd expected a relatively rapid rally. It also highlights that you couldn’t actually “buy� VIX in the 14′s.

And finally, we may have had a modest Friday-Monday impact. On Friday’s traders lower bids and offers in actual options to offset weekend decay. That has the effect of artificially lowering volatility indicators. This approach reverses on Monday as the calendar has caught up to the options prices.

Roll it all together, and I really would characterize the VIX moves this week as variation within a range, and not some sign of altered volatility expectations.

Follow Adam Warner on Twitter @agwarner.