CBOE VIX Analysis Indicates Volatility Will Remain High

06/02/2010 12:01 am EST


Price Headley

Founder and Chief Analyst, BigTrends.com

We noted recently that it was a very unusual event when the VIX popped 30% higher in one day on April 27 (from 17 to 22). That event certainly marked a new uptrend in the measure of option volatility. Since then, we've seen the VIX reach as high as 47 intraday—recently, pullbacks have been contained around the 30 level. Our analysis indicates that this higher VIX is likely to remain in place for some time. Additionally, we haven't seen a large corresponding lasting pop in the put/call ratios—which indicates that there is not an overblown put-buying panic, which might precede a big market bottom (and rapid decline in the VIX).

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The first chart below shows the width of the normal Bollinger Bands. You can see that the recent VIX volatility expansion has actually caused a larger increase in the width of the bands than occurred in 2008. The second chart shows 80-day Bollinger Bands (blue) and BigTrends Acceleration Bands (yellow). Note the closes above the top acceleration band, and also the sustained moves above the top Bollinger Band. Volatility, in terms of option premium pricing, looks likely to remain extended for some time based on our current analysis.

VIX Daily Chart with 80-Day Bollinger Bands and 20-Day Acceleration Bands

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By Price Headley of BigTrends.com

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