Volatility Spiked. Now What?

Well, that didn’t take long.

1) Is Shorting Volatility a Free Lunch?

2) What Happens When Volatility Rises?

These were the titles of my last two posts.

And today both questions were answered in extreme fashion.

The Volatility Index (VIX) rose 46%, the 7th largest 1-day spike in history.

The S&P 500 declined 1.8%, its largest drop since last September (while it felt like a large drop note that in a historical context this move was quite common).

The short volatility ETN (XIV) suffered a 17.8% decline, its 6th largest since inception in November 2010.

Those shorting the long volatility ETN (VXX) saw it rise 18.4%, its 5th largest advance since inception in January 2009.

Is panic selling a good idea after such spikes in volatility?

Not necessarily. Looking at the top 20 largest VIX spikes in the past, we find that over the next day/week/month volatility tends to fall and the S&P 500 tends to rise.

If we extend this list to the top 100 VIX spikes we find a similar result: lower volatility going forward with positive S&P 500 returns on average.

Will we see the same today? I have no idea. These are just averages and there have been a number of times in the past where volatility spiked and bad things followed. But more often than not, the opposite occurred, with volatility coming back down in the near term and stocks bouncing.

The best we can say after today is that shorting volatility is still not a free lunch and that stocks still tend to go down in the short-term when volatility rises. The extreme low volatility regime that we have been operating in for much of this year is likely coming to an end. Whether that means something bad or just something different (more normal) remains to be seen.

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This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.


Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts.  He is the co-author of four award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors and previously held positions as a Credit, Equity and Hedge Fund Analyst at billion dollar alternative investment firms.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.

You can follow Charlie on twitter here.


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