VIX has come down from its recent peak. But the real story to me is what’s going on in the VIX options market. In the recent past, whenever VIX shot higher the implied volatility of VIX options (ticker symbol:VVIX) also shot higher. For instance, in August 2015, when China devalued its currency, VIX climbed to 40.74. The implied volatility of the VIX options went all the way up to 168.75.
In the intervening years, VIX fell hard, while VVIX generally held above 90. The result is that the ratio of VVIX to VIX rose to its highest level ever in January 2018. But then things started to change. Where a blip up in VIX still causes VVIX to rise, the amount of increase is not as great.
For instance, this past December when the market was getting rocked, VIX got all the way up to 36. But this time, VVIX never closed above 112. We can see how the relationship changed as the ratio of VVIX/VIX crashed from its highest level ever at the beginning of 2018 to the lowest level since 2011 back on Christmas Eve 2018.
You can see when the ratio had been this low before, it was usually a time of pretty severe market stress: the Financial Crisis in 2008-2009, the Flash Crash 2010, and the European Debt Crisis in 2011.
$VVIX, $VIX, $SPY