Volatility – VIX & MOVE
Dr K C Gupta, YBB Personal Finance
VIX, also called the Fear Gauge, is widely known for the volatility of SP500. MOVE indicates volatility of Treasuries. Other indicators of volatility such as beta (movement relative to benchmark) & standard deviation (dispersion from the average) are discussed elsewhere.
VIX is based on near-term & next-term options for SP500 to estimate the annualized volatility of SP500 over the next 30 days (default). The factor for daily-to-annual conversion for options-based VIX is 365^0.5 = 19.1, or 19, & not 252^0.5 = 15.87, or 16; the latter (16) is used for standard deviations for stocks & bonds where trading days (52 x 5 – holidays) are used.
For example, a VIX of 20 means that the SP500 may move by +/- 20% (annualized) in the next 30 days, or may have daily moves of +/- 1.05% {= (20/19)%} for the next 30 days. VIX << 20 are low values (euphoria), VIX >> 20 are high values (panic). VIX is quite volatile, but one cannot buy VIX index. One can only buy futures (more expensive) & options on VIX. In fast-moving markets, these traded values may diverge from theoretical VIX index values; on 8/5/24, theoretical VIX index reached 65, but unusually, VIX futures never traded above 37. There is also volatility of VIX (volatility of volatility).
There are VIX for 1 day (VIX1D), 9 days (VIX9D), 3 months (VIX3M), 6 months (VIX6M), 1 year (VIX1Y). Just as the regular VIX (for 30 days) uses SP500 options that bracket 30 days +/- 7 days, VIX9D brackets 9 days options (variable days +/-), & similarly for others. Note that VIX9D & VIX look very similar. VIX1D captures the activity related to the 0DTE & 1DTE options (0-1 days to expiration) that have become very popular for speculation. These are business days, so weekends & holidays may create distortions.
VIX can be defined for anything that has traded options, so, there are VIX-like measures for Nasdaq 100 (VXN), small-cap Russell 2000 (RVX), emerging markets (VXEEM), oil (OVX), gold (GVZ) & several stocks.
VIX measures are estimated or projected volatilities through the options market. On the other hand, the actual or historical volatilities have been lower than the estimated volatilities, but that is known only in the hindsight.
Traders may use low VIX to buy stocks, high VIX to sell stocks, or directly trade VIX options or futures. Contrarians may use low VIX to sell stocks, high VIX to buy stocks. Others may just keep an eye on VIX.
MOVE Index is a blended measure of the volatility of Treasuries. It uses current prices of one-month over-the-counter options on 2Y, 5Y, 10Y & 30Y Treasuries. These are combined & normalized to a base value, so MOVE doesn’t have a meaning similar to VIX. MOVE has a historical range of 37-265. Peaks have occurred during credit crisis: Great Financial Crisis (GFC) high was 264.60 (record), 11/2008; Covid-19 Pandemic high 138.40, 03/2020 & low 36.62 (record), 09/2020; recent peak 198.71, 03/2023; current value 101.01, 3/14/25. So, MOVE is currently elevated but not alarmingly so.
Historically, options pricing was determined by complicated formulas (e.g. Black-Scholes-Merton formulas) that had estimates of volatility as one of the inputs. Myron SCHOLES & Robert MERTON won 1997 Nobel in Economics for their early contributions on the pricing of derivatives; the Nobel prizes aren’t awarded posthumously, but Fischer BLACK was recognized for his work in other ways (Black died in 1995). After the options markets evolved, the process was turned upside down. Now the VIX is derived from pricing of SP500 options.
While not a volatility measure, SKEW is an interesting measure derived from relative pricing of calls & puts. When it’s high, puts are more expensive than calls (indicating hedging), & when low, calls are more expensive than puts (indicating speculation). The information provided is similar to the Put-Call ratio that uses just the numbers of puts vs calls, but SKEW uses puts & calls pricing data to provide better quantitative information.
VIX & SKEW may work better in combination to assess the market:
High VIX, low/normal SKEW – closer to a recent bottom
Low/normal VIX, high SKEW – cautious bullishness; lots of hedging
Hi VIX, high SKEW – ongoing crash (rare)
Low VIX, low SKEW – supper bullishness (rare)
For more information, see https://ybbpersonalfinance.proboards.com/
