I've only been trading volatility for about 10 years, but the current action in VIX seems fascinating to me, especially when put in historical context.

The closing low for the VIX in 2017 is 9.77, which qualifies as one of the top few closes in the metric's history. I find it interesting that the last time the VIX was trading around these levels was December of 1993, the same month Bill Clinton signed NAFTA into law.

To think that VIX has returned to extremely depressed levels when politicians are currently discussing repealing or upgrading NAFTA seems like quite a coincidence.

The highest close in VIX history was 80.86, during the height of the Financial Crisis, or Great Recession (November 2008). That means that during my relatively short time trading volatility, the VIX has touched some of its most extreme levels in history.

It should be noted that in October of 2014, the VIX calculation was adjusted to include weekly options, which means that comparisons between pre-2014 VIX and post-2014 VIX may not be a precise science, either.

Considering the historical average in the VIX is around 19, one can see that relative to the financial crisis, the 2017 market thus far appears to be snuggled in a blanket of complacency.

Whether it be "Brexit," the surprise election of Donald Trump, or pretty much anything else, any pop in the VIX of late has gotten trampled like mall security on Black Friday.

It's the quick flattening of any rise in the VIX that I find most interesting, especially given that the VIX is already so low. The third week of May in 2017 was a classic example of the VIX's recent tendencies.

Political risk in Washington DC increased palpably in mid-May as new information emerged relating to the firing of the former FBI Director and the ongoing investigation of the new administration's ties to Russia.

This culminated on May 17th with a 40+ point selloff in the S&P 500 alongside a roughly 40% rise in the VIX.

While a down move of this size certainly stands out as an outlier since the US Presidential election last November, it wasn't sustained beyond a single day. Equities bounced back during the last two days of the week, and the VIX gave back a good portion of its gains, dropping almost 18% on Friday alone.

One important thing to keep in mind is that while the VIX may be known as a "fear gauge," it's movement and ultimate pricing is highly dependent on actual movement in the market (realized volatility). In terms of actual volatility, the first quarter of 2017 was one of the lowest on record since the 1960s, according to Barron’s.

So while many market participants likely believe that such a low reading in VIX does not accurately capture the current risk in the market, the VIX itself likely won't revert toward its historical mean until actual volatility picks up.

A big one-day selloff, sandwiched between weeks/months of tranquility, simply won't move the needle. The market either needs to experience a sustained selloff, or at the very least start to chop in a wider range.  

A pattern has certainly emerged regarding the behavior of the VIX after a big spike. However, as we well know, past movement isn't a perfect predictor of future movement.

That's one reason tastytraders rely on volatility metrics like Implied Volatility Rank (IVR) to make statistics-based trading decisions.

If you have any questions related to the VIX, or any other volatility product, we hope you’ll leave us a message in the space below or reach out directly at support@tastytrade.com.

As always, thanks for reading!


Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.