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The VIX

Posted on February 24, 2018

The VIX

Posted on February 24, 2018
2/23/18
The VIX
“Successful investing is much more about emotions than intellect” is a quote I’ve used a lot over my 40+ years in the business.  Keeping one’s emotions in check is key to calm execution of your written plan.  Obviously, this is why we created SellerySignals in the pursuit of an objective tool that ‘didn’t watch the evening news’ and wasn’t swayed by the ‘talking heads.’ The study of behavioral finance is a worthy endeavor if for no other reason than to get in touch with your own portfolio management anxieties and how to corral them.  If you weren’t sure, SENTIMENT indicators are some of the measurable ideas of what the crowd is thinking and can help steer your expectations.  The VIX is a really good one, particularly if you have at least a little knowledge of how it works and what it can tell you.
You can google for all the formulas the CBOE has used in its development, but generally speaking, it’s the net puts and calls traded against the S&P 500 on any given day.  People tend to buy more puts in times of panic than calls in times of optimism.  That’s why it’s called the ‘Fear Index’ because it’ll spike more in bad times than good.  Human nature, right.  Historically, a VIX over 30 means ‘buckle your seat belt’ and under 20 means calmer sailing.  In 2017, however, with the VIX in the 8-12 area, people were lulled to sleep.  BUT 10,20,30,40; WHAT DO THESE NUMBERS REALLY MEAN?
They provide an expectation of volatility for the next day, week or month.  So, if you KNEW today would have a 1%+ swing, would it not have allowed you to go through the day with a little more calm?  If you KNEW that next Monday was predicted to have a 2% swing, would you not be able to deal with it just a bit more effectively?  I think so.  So, here’s how it works:
Take Thursday’s closing VIX of 17.77 and divide by the square root of 252 (the trading days in a year and equal to 15.87) for the next days expected volatility.  Todays S&P volatility was expected to be 1.12%.  We came in about 1.26% depending on your quote machine but still, not far off.  I came in today EXPECTING a 1% move (remember, that’s up, down or both) and we got it…I wasn’t surprised.  Divide the VIX by the square root of 12, (3.46) for the next month’s expected volatility and it tells you to EXPECT a 5.14% movement.  For next week, divide the VIX by the square root of 52 (7.21) and it tells us to expect vacillation of 2.46% next week.  Interesting. 
So, for next week, with the VIX having closed today (Friday) at 14.92 means Monday’s S&P 500 is expected to vacillate by 14.92 / 15.87 = 0.94%.  Next week by 14.92 / 7.21 = 2.07% and the next 30 days 14.92 / 3.46 = 4.31%.
As Ron Burgundy (Will Ferrell) once said hilariously in the comedy Anchorman, “I’m in a glass case of emotion,” well let’s just say it was funny in the movie…not so funny when its your money that worries you.
God gave us a ‘sound mind’ so I suggest we use it and not let our emotions get the better of us.
Have a great weekend,
The Sellerys