VIX/VXV Ratio Study Suggesting a Rebound Into Next Week 10-18-18

The VXV (3 month volatility index) does not have a real long history, but has data going back about 8 years or so.

Today the VIX/VXV ratio closed a bit above 1.0 which is a theoretical imbalance in the ratio as the VIX is shorter duration and typically has lower volatility.

I ran a scan to look at the following:

• VIX/VXV > 1.0
• SPY closes down 1% or more
• Price is NOT at a 10 day low

So the idea here is that the volatility remains elevated with a sizable sell off, but price is NOT breaking to lower lows.  I wondered whether price being above recent lows had any difference in the past compared to price falling to new lows.

The data suggests a significant positive skew in the next week price action for the scan noted above.  

Compared to price making a new 10 day low on the day, our current conditions had both higher closing price action moving forward as well as a larger positive skew in MAX GAIN to MAX LOSS over coming days.

There was no positive skew in MAX GAIN to MAX LOSS over the next week when price was declining to a 10 day low with the other conditions listed above.

So in the scan above, 23 instances were returned, and in 20 of them, my option price model shows that the ATM put lost over 90% of its value by expiration 5 days forward.

This data suggests that currently there is an opportunity to sell premium or write a bull put spread with expiries either next Wednesday or next Friday as the data on both would be about the same.

I did write a credit spread near the close today with expiry of next Friday.

Pete