VIX Premium To SPX Historical Volatility At Record High In Q1

David Ott submits:A few years ago when "fundamental indexing" was the topic de jure, I saw Rob Arnott, chairman and founder for fundamental indexing firm Research Affiliates, debate academic legend and Nobel Laureate Bill Sharpe.During the debate, Sharpe had a great zinger: “I’ve never met a back-test that I didn’t like.” He went a step further when he said that he wanted to invest in a strategy with horrible back-testing results, thinking that t

By Bill Luby: Before I dive into a series of posts about the VIX futures, I think it is important to add some context in the form of several observations about the relationship between the VIX and the historical volatility (HV) of the S&P 500 index. In the absence of any information about the future, it turns out that historical volatility (a.k.a. realized volatility or statistical volatility) can provide a reasonably accurate measure of future volatility.

Article written by Prieur du Plessis, editor of the Investment Postcards from Cape Town blog.I have often in the past referred to the CBOE Volatility (VIX) Index, also known as Wall Street’s “fear index”. This is a measure of the implied volatility of S&P 500 index options – a high value corresponds to a more volatile market and therefore more costly options.

As the stock market tries to find its sea legs and the dust begins to settle around the 200-day moving average at the 1085 level I know many option traders are licking their lips at the prospect of selling option premiums while volatility is still at the current high levels. But before we go rushing into that most dangerous game there are a few important things to take note of:

Bill Luby submits: With all the comments I have heard about persistently falling volatility, one would think that the drop in the VIX to their 17.00 level is an unwarranted aberration. Several factors suggest otherwise.

The Weekly Leading Index (WLI) of the Economic Cycle Research Institute (ECRI) slipped again in today's update. It is now at 129.1 versus the previous week's 129.7 (revised from 129.6). See the WLI chart in the Appendix below. The WLI annualized growth indicator (WLIg) also eased, now at 7.6, down from last week's 8.4 (revised from 8.3).

The Weekly Leading Index (WLI) of the Economic Cycle Research Institute (ECRI) slipped in the latest public data. It is now at 129.7 versus the previous week's upwardly revised 130.7 (previously 130.6). See the WLI chart in the Appendix below. However, the WLI annualized growth indicator (WLIg) rose, now at 8.3, up from last week's 7.2.

Bill Luby submits: While it is widely understood that the VIX has a tendency to fall during the holidays (due largely to fewer trading days), a point that slipped past many pundits is that historical volatility has been excessively low during the past few weeks.