Another silly question--why does VIX, when it spikes, presage a rally?
Jill, I'm reading my McMillan on Options, (page 240) and am not sure of the "why", but here are a couple of quotes:
For broad-based index options, extremely low implied volatility normally precedes a market explosion. This explosion is often on the downside, but not always.
An extremely high implied volatility reading, especially if it occurs as a spike, is generally a sign that a short-term bottom is at hand for the broad market.
Take a look at a daily graph of the VIX for the past several months and compare it to a daily graph for the Nasdaq. There are some amazing correlations here:
- The lowest value of the VIX over the past several months was an intraday 17.70 on July 16th, the exact same day the Nasdaq peaked in July at a close of 2864.
- On only 2 days in Jul/Aug did the VIX go over 30, Aug 5th and Aug 10th. The 2 lowest days for the Nasdaq for all of Jul/Aug were Aug 5th (intraday low of 2474) and the lowest day, Aug 10th, (intraday low of 2442).
- In September, the highest intraday on the VIX was 32.33 on the 24th. In September the Nasdaq bottomed on Sept 24th at an intraday of 2684. The only other day in September the VIX spiked over 30 was the 28th (at 30.80). It corresponds to the 2nd lowest intraday for the Nasdaq in September (2694).
- In October, the VIX bottomed on the 11th at an intraday of 19.74. This is the first time it was under 20 since July 19th, the summer (intraday) high for the Nasdaq. This October bottom for the VIX on the 11th is the same day the Nasdaq peaked with a close of 2916.
- On Friday, the VIX peaked at 33.44, the highest it's been since last Feb 18th (34.18). Feb 18th was the day the Nasdaq bottomed at 2224, the lowest we've seen it since the middle of Jan.
- Oct 8th of 1998, the day the market crashed, the VIX spiked to a value of 60.63, the highest it's been in at least the past several years.
PS. Hey Jim Willie! How's that for the value of TA?
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