The Collapsing VIX Just Set a New Record
The VIX hit a low of 9.53 early this morning, marking the 13th straight day with a low in the VIX below 10.
This is the first time in history we have seen such a streak.
In late to July August, we had a run with 17 of 19 days showing a sub-10 VIX.
Let me break down just how bizarre these numbers are.
Since January, 2, 1990, the VIX has dipped below 10 on exactly 69 days.
50 of these 69 days were after April 2017.
30 of these 69 days have been after June 2017.
Now, on October 6, 2014, the CBOE began using a new method for calculating the VIX to incorporate weekly SPX options.
For the sake of an apple to apples comparison, let's look at those numbers.
Since then, we have had a total of 51 days with a low in the VIX below 10.
50 of 51 happened after April 2017!
And 30 of 51 happened after June 2017!
This is historic… and insane.
So is it time to bet on a spike in the VIX?
I am considering doing so… but don't think it's easy money.
Yes, volatility tends to mean-revert, but good luck figuring out when.
Here is a 20-year monthly chart of the VIX:
As you can see, there have been extended drops in the VIX.
For example, the VIX had multi-year downtrends from 2003-2006 and from 2012-2014.
We very well could be in another one now that extends to 2018 and beyond.
And all of those massive spikes you see on the chart?
They were very short-lived, and there's no guarantee you could have acted quickly enough to lock in massive profits on volatility bets.
And while you're waiting for a spike, what's happening to your SPX/SPY puts and VIX calls?
They're getting eaten alive by time decay.
2017's absurdly low volatility feels like the inverse of the tech stock highs of the dot com boom.
We all know it's irrational. But it's incredibly difficult to predict the end of the craze.
I am strongly considering allocating a small amount of capital to far out-of-the-money VIX call options.
Why?
Because just as the market is underestimating volatility now, it's likely to overestimate it in the future.
The CBOE also recently introduced VIX options with an 8.50 strike price, which is likely a reaction to the VIX' 8.84 print back on July 26.
I suspect that when the VIX has its next megaspike, we'll look back at this news as a contrarian indicator