This is pretty interesting. It’s a graph that gives tells you what has happened to VIX as the S&P 500 fluctuates during the week between Christmas and the end of the year. You can clearly see that as the S&P 500 moves higher, VIX tends to drop. As the S&P 500 moves lower, VIX tends to rise.
The key is, that the line does not cross at zero. You can see that when the S&P is unchanged, the yellow trendline crosses at 0.30%. That means, when the S&P 500 stands still, past trends tell us that VIX could be expected to rise about 0.3 percentage points. In numerical terms if the market doesn’t move, VIX would rise from 17.00 to 17.30.
This is not new information to people who follow my blog or any one of the other terrific option blogs out there. What is new is how this graphically illustrates what other savvy traders already know: VIX tends to drop going into Christmas, as people anticipate a period of quiet. Then, once we get into the middle of the holiday quiet, people start adjusting option prices upward for a return of volatility as the beginning of the year approaches.
In other words, VIX anticipates. So a blip up in VIX during this period is totally meaningless. That’s why the best advice is to not read something into every move the VIX makes. It’s only significant if the VIX moves counter to the norm. For instance, if the market were to decline and VIX were to fall, that would be truly unusual during this end of year time frame.
– Don
