The One-Year Anniversary of the VXV

By Bill Luby | November 13, 2008 | 11:22 AM | 0 Comments

One year ago the CBOE launched the VXV, which is a variant of the VIX that calculates implied volatility in SPX options over the course of the next 93 days instead of the 30 day time window used by the VIX.

In December 2007, with the VXV less than one month old, I went out on a limb and suggested in The VIX:VXV Ratio that comparing the relative levels in the VIX and VXO might serve as an important market timing signal in a way that is analogous to VIX term structure data.

Much to my delight, from November 2007 through the Lehman Brothers bankruptcy in September 2008, the VIX:VXV ratio performed nearly flawlessly, generating timely buy and sell signals. In a post-Lehman world, however, the VIX:VXV ratio has struggled with a bullish bias as the markets have headed down.

In the chart below I present my original thinking from December 2007 of how the VIX:VXV might be applied. Since that time, I have made a number of enhancements for my personal use that I have yet to post about on the blog. A couple of those enhancements now suggest that the pre-Lehman threshold levels such as 1.10 and 0.90 are once again now relevant. This would make the current VIX:VXV ratio of 1.12 an excellent buying opportunity.

For a long time, I was the only person who talked about the VIX:VXV ratio. Over the course of the past year, however, it has generated a strong following. Now that readers have a year of data to digest and a broad range of market conditions in which to evaluate the indicator, what enhancements or modifications to the VIX:VXV ratio would you suggest? Feel free to discuss this in the comments section below.

 

 

[chart courtesy of StockCharts.com]