Carpenter Analytix

Carpenter Analytix
Models & Metrics

Actual & Implied Volatility

Sigma & VIX

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VIX is implied volatility as derived from CBOE options prices relative to underlying S&P 500.  High VIX levels are generally taken as indications of investor anxiety (often following price declines), and interpreted as "contrarian" indication of likely advance.  conversely, low VIX is generally taken as indication of probably weakness.

The biggest single determinant of option-implied volatility is actual volatility.  When prices fluctuate widely, traders expect wide fluctuation to continue, and the expectation is priced into options.  So implied volatility can be assessed "high" or "low" relative to actual volatility.  

We track actual volatility by annualized standard deviation of returns, comparable to the VIX scaling.  We call this the Sigma series.  The value of this actual volatility is almost always less than implied volatility.   But once in a while, VIX (implied vol) occasionally exceeds Sigma (actual vol).  The occasions usually lead to short-term uptrend.  

Here is a chart showing the Sigma/VIX ratio.  Wherever the ratio exceeds unity (1.00), the S&P 500 actual volatility exceeds implied volatility.

Sigma/VIX Ratio of Actual/Implied Volatility

 

                
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