Doomsday Scenarios: Signalled By The Volatility Of The VIX

 | Oct 11, 2013 01:06PM ET

VIX spot is quoting at $15.47, down 6.1% with IV30™ down 3.0%. The LIVEVOL® Pro Summary is below.

VIX is the 30-day volatility index for S&500 options. It is also known as the fear index as it reflects future looking near-term risk in the S&500 index.

This is a follow up to two prior posts:

10-8-2013: Follow Up; It's the Implied Vol of the VIX that is Our Signal; Did a Bi-partisan Congressional Vote Bring us to the Brink of Another Great Depression?

10-3-2013: VIX - Doomsday Scenarios; It's Not the VIX that Matters; It's the IV of the VIX That is Our Signal

Those articles surrounded the idea of whether or not (or how) VIX could be used as signal to the potential doomsday scenarios that were (and still are) being surveyed if the US government defaults on its national debt. Here are a few snippets from those posts (below), but the main conclusion I came to (which is my opinion) is that it’s not the VIX that is our signal, but rather than implied volatility of the VIX. I still feel the same way. But this time, there's some empirical evidence, and it's fascinating.


10-8-2013
While the market is tumbling and panic may be setting in, I actually say, as of this writing on the close of Tuesday, that we're not in panic mode yet and I see that not in the VIX (which is ripping), but in the implied volatility of the VIX. Here are some snippets from the prior post:


10-3-2013
The political stand-of will end. It might take a long time. The US may even default on debt payments (unlikely, but possible). A downgrade of US debt is more likely and remember, the debt rating is based on the highest rating. S&P already downgraded the US debt... What if Moody's does too?...

So let's walk along the string that looks to a catastrophe. Downgraded US debt --> defaults on outstanding debt. Then what? Will the country have a shutdown government forever?

My best bet would be no. If you want to get the real pulse of the market, you can look at the VIX, but it's the vol of the VIX that will really tell you where we are. If the implied volatility of the VIX breaches 115%, that would represent a multi-year high; and that could be a signal of a doomsday market reaction (but not necessarily a doomsday reality). Watch that number. If it closes above 115%, I think a market spasm is a real possibility b/c fear could overpower the market. Until then, I see posturing and fear of fear, but not necessarily anything else.

Let's take a look at the empirical evidence of late.

Let’s turn to the two-year VIX Charts Tab is included (below). The top portion is the spot price; the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).